Unit 1: The Basic Economic Problem: choice and the allocation of resources

Economics Unit 1: The Basic Economic Problem

Economics is the study of how people with limited means and unlimited wants choose between alternatives to best satisfy their needs and some of their wants.

Everybody has Limited Means and Unlimited Wants. They are:

Limited Means

Unlimited Wants

Money

Technology

Time

Cars

Skill

Makeup/Jewellery

Family Support

Etc.

Both of these lead to the Central Problem of Economics: Scarcity. We have a limited number of resources e.g Natural resources (soil, climate water etc.), Man-made resources (machinery, buildings, equipment etc.) and human resources (people and their skills). All of these resources are scarce, because they are in limited supply in comparison to the demand to use it. Because we cannot produce every good we want, we have to make a choice between two alternatives and sacrifice something in order to make something else. This is opportunity cost: when you have a choice between alternatives and you miss out on the next best option, which is the opportunity lost.

We use the limited means at our disposal to get our needs and some of our wants. But there is a problem for us to solve – we have a vast number of wants but only limited resources with which to satisfy them all. This means we will have to make a choice.

The Factors of Production (FOPs) are the four things which make a business work: land, labour, capital and enterprise:

FOP

Description

Resource

Reward

Example in school

Example on a farm

Land

A “gift of nature” not…