The economic problem

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  • Created by: Ritika
  • Created on: 17-01-15 14:01

Economic problem & opportunity cost

The economic problem is that there are only limited amount of resources available to produce the unlimited quantity of goods and services people desire.


Opportunity cost- the cost of the next best sacrificed.

 The movement from point A to point B on a PPF illustrates opportunity cost. By deciding to produce more capital goods the opportunity cost would be the loss of consumer goods being produced

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Nature of production

  • The ultimate purpose of economic activity is to improve people’s economic welfare and standard of living.
  • For this to happen material goods and services must be consumed.
  • All goods that are consumed must be first produced and this requires the use of economic resources.
  •  Finite economic resources are used up when producing goods and services
  • Production is a process or a set of processes that converts inputs into outputs. 


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Factors of production

  • Factors of production: inputs into the production process, such as land, labour, capital and enterprise.
  •  Economists call the inputs in a production process- factors of production
  • Land, capital, labour and enterprise are the factors
  • Entrepreneurs are different from the other factors of production as they are the once who address the issues, deciding what to produce, how to produce and for whom to produce.
  • The entrepreneur is often the financial risk taker and decision maker.

  • Profit is the entrepreneur’s financial reward, results from successful decision-making. 

  •      Entrepreneurial profit is the profit left over after the cost of employing the other factors of production is deducted from the sales revenue gained from the sale of goods and services
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Economic systems

An economic system is a set of intuitional arrangements whose function is to employ most efficiently scarce resources to meet the ends of society.

Classification of economic systems by allocative mechanism  

There are a variety of ways in which wealth and purchasing power can be allocated among individuals.

  • The two allocative mechanisms by which economic systems are defined are market mechanism and the command mechanism. Also known as price mechanism and planning mechanism.
  •  In a market economy goods and services are purchased through the price mechanism.
  • In a command economy, government officials or planners allocate economic resources to firms and other productive enterprises. 

            Market Economies   

  •  pure market economy, the market mechanism performs the central economic task of allocating scarce resources among competing uses.
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Economic systems 1

Command economies

  • A complete command economy is an economy in which all decisions about what, how, how much, when, where and for whom to produce are taken by a central planning authority. 
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