The Economic Problem Flashcards
The problem of scarcity-where there are unlimited wants and finite resources
Resources are scarce, however wants are unlimited. Therefore there are finite resources and not all wants can be satisfied. As a result of this, decisions need to be made what, how and for whom goods and services are produced. Economics can be used as a tool when choosing between the competing demands placed on finite recourses. Most common way of rationing is through money, those who can afford a G/S are able to use it despite many more that may want to use it.
The distinction between renewable and non-renewable resources
Renewable resources are those that are being replaced the same or faster than they are being consumed. For example solar energy would be classed as renewable due to the fact that it can be used without the effect of it running out. Non-renewable resources are being consumed faster than they’re being replaced by natural means. Eg oil. This is especially the case due to growth in population as well as rising incomes of existing population thus putting more pressure on these non-renewable resources. Therefore the question of how,why and whom goods and services are provided needs to be answered before allocating resources.
The importance of opportunity costs to economic agents(consumers, producers and government)
Opportunity cost is the cost of the next best alternative forgone. This is what economic agent is losing as a result of making a certain choice. These choices have to be made due to the fact that resources are scarce but wants are unlimited. Therefore, there is always an opportunity cost when choices are made. An example of this is when the government are allocating their budgets on different recourses eg an increase in spending on health nah leave them with less money to spend on education. The opportunity cost is the reduction on education and the costs that are associated with this eg a reduction in the quality of labour force. Consumers experience opportunity cost with every decision they make eg should a consumer spend money buying designer clothes or textbook, the opportunity cost for the consumer of buying designer clothes would be the textbook. Further costs may occur such as poor grades. Rational consumers will always try to make decisions which have lowest opportunity cost. An example of opportunity cost for a producer may be whether they should increase spending on capital goods or increase the dividends to shareholders.
