economics notes - the basic economic problem

The basic economic problem

• Resources are inputs to productive activities with goods and services as the output.
• Therefore resources are used to produce goods and services.
• Factors of production = resources
• The 4 factors of production are: land, labour, capital, enterprise.
• Land is the natural resource involved in the production of goods and services i.e. the sea. Its reward is rent and is geographically immobile. 
• Labour is the human resource involved in the production of goods and services in which it can be categorised to skilled and unskilled labour i.e. teachers and cleaners. Its reward is wages and is geographically mobile.
• Capital is the manmade resource involved in the production of goods and services i.e. machines. Note that money is not a capital. Its reward is interest.
• Enterprise is the skills of a business person to manage a firm by combining the 3 factors of production, undertaking risks and making key business decisions. An individual who has enterprise is an entrepreneur and an entrepreneur's reward is profits. 
• Scarcity is a situation where there are limited resources against unlimited wants.
• This means that there are finite resources to satisfy infinite wants so individuals will have to decide which want to satisfy, at the same time, resources have alternative uses which gives rise to opportunity cost.
• Opportunity cost is the next best alternative foregone.
• As economic agents (individuals, firms, government) decide on which want to satisfy, they will need…