1.1 The Economic Problem and the Role of Choices
Economic Problem: How a society can satisfy the unlimited wants with the limited resources, summary:
- Our wants are unlimited.
- Resources are scarce.
- We cannot satisfy all our wants with our limited resources, therefore we must choose between them.
Needs are essential to live (eg. food and shelter).
Wants are the desires of individuals or the community.
Economists say that individuals derive utility (satisfaction) drom the consumption of G&S.
Individual wants = desires of each person.
Collective wants = wants of the whole community.
Each economy must ask the four basic questions:
- What to produce?
- How much to produce?
- How to produce?
- How to distribute production? inequitable (uneven) equitable (even).
1.2 The Production Possibility Frontier
The opportunity costs represents the alternative use of resources.
- Represents the cost of satisfying one want over an alternative want.
The PPF can be used to demonstrate how opp. costs arise when individuals or the community make choices.
Read more off hard copy of notes for PPF.
1.3 The future implications of choices
Consumer G&S are items produced for the immediate satisfaction of individual and community needs and wants.
Capital goods not been produced for immediate consumption but will be used for the production of other goods.
In choosing between satisfying present or future wants:
- Individuals: Spending (satisfying present wants) or saving (raises future living standards).
- Businesses: Price, how to manage employees, how much to produce, what resources to use.
- Governments: Influence choices of individuals and businesses.
2.1 The production of G&S
Business firms combine the factors of production to produce G&S.
- Goods = items for consumption (eg. food, watch, book)
- Services = benefit to consumers (eg. Infrastructure)
The four main factors of production are:
- Natural Resources (land) ------> Rent
- Labour ------> Wages
- Capital ------> Interest
- Enterprise ------> Profit
2.2 The Distribution and Exchange of G&S