Note on Chapter 2, The Economic Problem

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Economics Notes ­ Chapter 2 18th September 2011
The Economic Problem
Economics and the Economic problem
The economic problem (EP) is that there are only limited amount of resources to produce
an unlimited quantity of goods and services people desire.
The Economic problem, scarcity and choice
The EP exists because the goods and resources needed to produce other goods are scared.
If goods are scarce and incomes limited, choices must be made; this is called the
opportunity cost.
PPD (Production Possibility Diagram)
This opportunity cost occurs on both a micro and macro scale and can be represented on a
PPD. The PPD shows the different combination of two goods that can be produced with a
fixed quantity of resource. The curve shows what the economy can produce, assuming the
labour, capital and land are used to the full.
We can see on the PPD below that X is where the economy is producing its max. number of
Consumer Goods but no Capital goods, and vice versa. The purchase of Capital goods is
called an investment.
Point A shows the economy producing k1 Capital and C1 Consumer; if an economy wants to
grow they should increase the production of Capital goods i.e. move from point a to point b
on the diagram.
Opportunity cost
The movement from a to b has a cost of less consumer goods. This is called an opportunity
cost as the government must sacrifice the consumer goods, however will get more Capital,
which are used to boost the economy.
The nature of production

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The ultimate purpose of economic activity is to improve people's economic welfare and
standard of living. However, almost all goods we consume must first be produced; finite
resources are used and, once used, cannot be used again ­ renewable resources can be
used again and again. The basic nature of production (as shown below), is a process that
converts inputs into outputs.
Factors of production
The factors of production are the inputs namely land, labour, capital and enterprise.…read more

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The UK as a mixed economy
The development of mixed economies
A mixed economy developed quickly when industries (i.e. coal, rail and steel) were taken
into public ownership. This worked well and most agreed that consumer goods and
services were best kept private but natural monopolies should be nationalised. A mixed
economy was right for the UK.
Recent changes to the UK economy
From the 1960's onwards a growing minority blamed the mixed economy for the UK's
deteriorating economic performance.…read more

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