The Economic Problem

  • Created by: April15
  • Created on: 27-01-20 08:43

The nature and purpose of economic activity:

  • The central purpose of economic activity is the production of goods and services to satisfy needs and wants, and thereby to improve economic welfare.
  • Everyone has certain needs in life- e.g. food, water, a place to live and so on. Everyone also has an infinite list of things they want- e.g. designer clothes, smartphones, holidays, houses, etc.
  • However, there's a limited amount of resources available to satisfy these needs and wants- resources are scarce.

These facts lead to a basic economic problem:

  • Scarcity requires a careful allocation of resources. In economics, a wide range of things count as economic activity.
  • Since there's an endless array of things that could be produced and consumed, but only limited resources, this leads to three fundamental questions:
  • What to produce?
  • How to produce it?
  • Who to produce it for?

The agents in an economy can usually be thought of as:

  • Producers - firms or people that make goods or provide services
  • Consumers - people or firms who buy the goods and services
  • Governements - a government sets the rules that other participants in the economy have to follow, but also produces and consumes goods and services

Each of these economic agents has to make decisions that affect how resources are allocated. In a market economy, all economic agents are assumed to be rational, which means they'll make the decisions that are best for themselves. These decisions will be based on economic incentives, such as profit making or paying as little as possible for a product.

  • This will be those goods that firms can make a profit from.
  • Firms will want to produce the good in the most efficient way they can, in order to maximise their profits.
  • Firms will produce goods for consumers who are willing to pay for those goods.

Economic resources: The scarce resources (inputs) used to make the things people want and need (outputs) can be divided into four factors of production. These factors are land, labour, capital and enterprise.

Land (all the natural resources in and on it):

  • As well as actual territory, land includes all the Earth's natural resources:
    • Non-renewable resources, such as natural gas, oil and coal
    • Renewable resources such as wind or tidal power, or wood from trees
    • Materials extracted by mining (e.g. diamonds and gold)
    • Water
    • Animals found in the area
  • Nearly all things that fall under the category of 'land' are scarce- there aren't enough natural resources to satisfy the demands of everyone

Labour (the work done by people):

  • Labour is the wok done by those who contribute to the production process. The avaiable population who are available to do work is called the labour force
  • There's usually also a number of people who want to work and are old enough to work, but who don't have a job. Economists refer to these people as unemployed
  • There are also people who aren't in paid employment but still provide things people need or want
  • Different people have different


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