What is the economic problem

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Factors of production

Factors of production are the resources used to produce goods and services, they are:

Capital:This is machinary and technology used to produce goods and services

EnterpriseThese are the business ideas and innovation for the production of goods and services

LandThese are any natural resources that come from the land, for example fossil fuels, crops etc. 

LabourThese are the people and the workers who produce the goods and services. 

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Scarcity, choice and opportunity cost

The basic economic problem is that there are unlimited wants but scarce resources. 

Opportunity cost is the cost of the next best alternative that has been forgone when making a choice. E.g. using money to employ new workers instead of investing it in capital. 


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Economies and sectors

A Market economy is where all goods and resources are allocated by firms and individuals

A Planned economy is where all goods and resources are allocated by the government. 

A Mixed economy contains elements of both- e.g. in the UK the NHS is planned however firms and individuals allocate the resources of certain goods and services. 

The private sector is ran by individuals and firms. The public sector is government ran. 

The primary sector is the extraction of raw materials e.g. oil, growing crops, fishing

The secondary sector is where the raw materials are turned into goods e.g. factories

The tertiary sector is the service sector e.g. shops, banks 

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Specialisation is where individuals, firms and regions produce only one type of good/service

Specialisation increases productivity because if all energy is focused on one part of the production process or one good or service then this is done more efficiantly.

Individuals specialise when they choose particular subjects to study, or are trained to take part in only one part of the production process and they can produce more goods in a given period of time. While productivity is increased the disadvantages can include boredom, the cost of training, and the increased cost of employing better trained workers. 

Firms specialise when they only produce one type of good or service. Because only one type of good is being produced productivity increases and cost of production falls. However if a rival company overseas can produce these goods more efficiantly and cheaper, or if the industry collapses there is nothing to fall back on. 

Countries and regions can specialise- e.g. the UK specialises in finance. Regions can specialise when they have a particular resource e.g. steel in Sheffield used to be the industry. However if this industry collapses once again there is nothing to fall back on and unemployment can happen. 

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Functions of Money

Money can be used as:

A store of value- money doesn't lose it's value or go 'bad' after time it can be kept and still have the same value. 

A unit of account- money can show the value of goods and services and the value of these can be compared by price. 

A means of deferred payment- if people don't want to or cannot afford to pay for something in one go they can pay in stages e.g. mortages. 

A medium of exchange- money can be used to pay people for doing services and jobs and can be exchanged when buying goods and services. 

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