The basic economic problem ‘The nature ofthe economic problem ‘The factors of production Opportunity cost Production possibility curves Multiple choice Structured questions The resources available to produce g are scarce compared with our limitless wants. Land (natural resources), labour (human effort), capita (Inusnan-made resources) and enterprise (die knowledge and skills people production) are {10 organize Il scarce resources. They are factors of production because they are organized into flems by entrepreneurs to produce goods and services to satisfy Resources are inputs to productive activity and product (goods and services) ate outputs from productive activity. However, because there are jot enough, dnd want, we must make choices. Hor example, if we choose to use up resources cannot be used to produce food. This opportunity is foregone Making a choice between alternative uses of scarce resources therefore always involves a cost in terms of what we have to give up in return. The benefit of the rhext best alternative foregone is the oppor that decision, Scarcity of resources relative to human wants is the basic or central economic problem, The study of ind informing decisions about how best to use scarce resources in an economies therefore involves examin attempt to satisfy as many of our needs and wants a possible ro maximize economic welfareThe nature of the economic problem The factors of production Finite resources and uunimites wants Feonomie and free ouds Definitions of the factors of production and their rewards Mobility of the factors of production (Quantity and quality of the factors of production Define the economic problem and provide examples of now It arfects consumers, workers, producers and governments Explain the difference between economic youd and free youd Using examples, define the factor inputs used in production ~ land labour, capital and enterprise. Describe the different factor payments or rewards received by factors of production. Use examples to explain the nature of each factor of production. Identity the influences on the mobility of the various factors of production Describe the causes of changes in the quantity and quality of the various factors of production,Finite resources and unlimited wants Economic and free goods wammm World News Oil runs out ‘Today the world’s oil supply has dried up. A crisis meeting, ‘of world leaders took place in Washington last night. Yesterday the top oil producing ‘companies of the world declared that the world’s supply of oil was, now exhausted. The last barrel ‘of oil has been filled and the oll rigs will drill no more. The world now faces an energy «isis. No ‘more oil will mean no more petrol fortransport or machinery. There can be no more plasite for energy mmisterstrom arounatne worl are meting ‘components in many household today in Switzerland to discuss the crisis and try to products like televisions, find solution. Coal deposits are low and nuclear microwave ovens, cars and _ powerstationsare already overworked to meet the telephones. ‘demand for cleric, Resources are finite sappen in the future. Its hard to imagine a world without oil but even now there is only a limited amount of oll left in the ground. In other words, its finite or limited in supply. As more and more is used up there will come a time when no oll remains. the Worlds oll took many millions of years to form but we may use itall up ina few hundred years. However. it isnot just oil that is finite. Some forecasters suggest if we continue 10 consume goods and services in the future atthe same rate as we do today many natural resources, such as aluminium, copper, lead, tin, zinc, and timber from the Jast remaining rainforests. will ll be used up within the next 50 years. Even the Jand we farm or build on, and the dean air and drinking water we need are all Lint or limited in supply {you imagine the world asa round ball then itis possibie to see that only a limited amount of these resources can be squeezed from i ‘The nature of the economic problemResources are used wp Resources ate important because they are used to make goods such as bread, inthe production of televisions, car, fruit and vegetables, and to provide services, including goods and services Pausty tputance, waunpon, eluate, policing amd lea Production therefore involves using resources to make and sell different goods and services. Resources such as natural materials, land, machinery and workers, are the inputs to productive activities and goods and services are Ueir products or outputs. > 3.6.3. ‘Any activity that fils to satisfy a human need or want is not a productive activity according to economists. So, for example, if resources are used to make clothes nobody wants to wear, televisions that fail to display moving Innages, clocks that cannot keep time or any other good or service that fails to satisfy a human need or want, then those resources have not been used productively ‘The people and organizations which make and sell goods and services are known as producers, 1¥ Resources used to produce other goods and services include natural materials, people, machinery and landBut human wants are without Limit Definitions of the factors of production and their rewards So what il the resources we use to produce goods and services are limited in supply? The world is a big place and it may take many years for non= renewable resources like oil, coal, gas, copper and iron to run out ‘We ean also renew or replace other resources such as trees for timber, corn 10 eat and people to work in shops, offices and factories. Infact, the population of the world is growing rapidly. A larger global workforce will be able to Jroduce more machines, build sore factories and invent new saterals anid better ways of producing food and other goods and services. Does this mean limited resources is not such a big problem? Before you agree or disagree, look at Activity 1.1 below. Look at the two photos A and B. Photo A epresents modern city life; oto B shows a group of people living in a poor African village. What nceds have the two families in ‘common? Which family will not be able to satisfy al its needs? What do you think are the wants of the family in pieture A? What do you think are the wants of ‘the family n picture 8? Why can’t the wants of either Faily be satisfied? What do you think are the main ferences between needs and wants? 1 ne world population continues to grow, what do you think wil happen to the total of human needs and wants overtime? none ttemnnicrnin @Human needs and wants people have the sau need food, clean water and some shelter from the extremes of weather in ‘order to live safely and to survive. However, people usually want far more than Ley need. We want fashionable clothes, big televisions, sinartphes, car, holidays, insurance and banking services, and much more. However, unlike ‘our human needs we do not need to satisly our human wants to survive. sic human needs. Whether rich of poor, we all Just imagine if we could lst all the goods and services that everyone in the World wanted, The list would go on forever and would grow longer as the world population expands. Our human wants are therefore without limit and itis not possible to satisfy them all, This is because there will never be enough resources In the world 10 do so. Resources are scarce compared to our jed wants for goods and services. Some people cannot even satisty all of their basic needs because of the scarcity of resources ‘What do we need and what do we want? Below ts 2 umbled collection of aierent goods and services. Draw a table ke the one. bbelow and sort them into needs and wants, giving reasons for your choice. ‘You snould now understand the Aiference between needs and wants Write a sentence to explain what these two words mean. Televsions provide entertainment but are not essential for survival‘We must choose what to produce and consume R ‘A. Afrce good is without init A. Consumption Free goods are items we may need or want that are without limit. For ‘example, air isso abundant in supply that you can breathe it without reducing tHe aimount available 1 other peuple. Similarly, dhere fs enough natural light during every day for everyone to enjoy as much as they want without it running out. As such, there is no point paying for air or natural light if they are freely available and without limi, Many ideas and inventions are also free goods. For example, new dance "moves or yoga exercises can be copied freely by one or more people without reducing the ability of others to do the same, Similarly, when you ¥ page it does not prevent other people from viewing it, ahough if everyone in the world did so at the same time it might crash the internet. However. there are very few truly free goods. Most of the goods and services we need and want are limited in supply compared to our demand for them because our wants are without limit and there are Just not enough resources available to produce everything we want, We must therefore choose what goods ‘and services to produce with our searce resources. For example, producing more cars will leave fewer resources available to produce computers. > 1.3.2 Unlike free goods, cars and computers along with most other goods and services are economic goods. This is because they are limited in supply. 1F you drive a car, use a computer or even wear a coat or eat a eake, these goods will no longer be available to others to use. ecause they are limited n supply people are therefore willing to pay to obtain these and other economic goods In onder to satisly some of theit wants ‘A. An economic good is imited in supply This good may be given away for fee but it stil limited in supply because sarc resources re needed to produce it ‘What is consumption? ‘We consume goods and services when we use them to satisfy our human needs and wants. ‘When we eat we are consuming food. When we watch television we are contsunning elecircty, te television sex anid the services ofa television company, When we go to schools and colleges, we are consuming the services of teachers. We are consuming when we read books, sit on chairs, sleep on beds, put money into a bank account, ask a policeman the time, listen to the radio and use up any other goods and services in order to satisty our wants. Consumption therefore involves the using up of goods and services to satisty human needs and wants, ‘The nature of the economic problem"¥ Durable and non-durable goods However, because these goods and services are finite we will be unable to satisfy all of our wants. We must all therefore choose which goods and services ve will consume. The choices we cach make will aso alfect other people. This is because our consumption of economic goods will result in fewer economic {goods heing available to other people. This is because economic gonds are limited in supply. The people and organizations which buy economic goods and services to satisfy thelr wants are known as consumers and the total amount they spend each periad on economic good is called concumption expenditure. > 2.2.1 ‘What is exchange? Some people may be able to satisfy some of their wants by producing a number of goods and services for their own consumption. For example, keen. {gardeners may grow vegetables ta eat to satisfy part of thelr need or want for food. Others may make furniture from wood for their families to use. However, very few people can make all the things they want, Consumers must thetetore engage in trade or exchange with producers to obtain those ‘ecanomic goods they cannot produce themselves. In modern economies most people are able to do this by going to work to earn money. They thes ‘exchange this money for the goods and services they want that are produced by other workers. » 3.1.1 Different goods and services satisly dlferent needs and wants. Economists group together diferent products vg four mati categories. Consumer goods or capital goods? We can choose to use scarce resources to produce many different types of ‘constumer goods and services. However, scarce resources can also be used to produce capital goods, Allocating more resources wo the production of capital 00d will therefore reduce the amount of resources available to produce consumer goods and services. A consumer good is an economic good that satisfies an immediate consumer need oF want. Soine consumer goods are called consumer durables because they lasta ong time. for example cars. washing machines. televisions. furniture and computers, They can be used repeatedly over many months oF years to sauisfy a want before they eventually wear out. i contrast, non-durable goods are perishable or used up quickly, for example food, drink, matches, petrol and However, not all of our wants ean be satisfied with physical products. we also want firms to provide us with services. For ‘example, we may want the services of doctors, bankers, insurance agents, ow cleaners and teachers. They rovide consumer services.Capital goods such as screwalrivers, drills, tractors lorries, power stations and factory buildings do not satisty any immediate human needs or wants. ‘They are human-made resources used in the production of other goods and The purchase of capital goods is known as investment, Investments in capital ‘goods, lke factories and machines, will increase the capacity of organization to produce goods and services. > 1.4.4 How the economic — $0, we now know what the central problem in economics is. problem affects us all “The scarcity of resources relative to human wants is the central problem in Lumted resoures produce and co yy means we must all make chokces about how we tse our That Is, we must decide what goods and services we will ime. > 2.2.2 UNLIMITED! scarce! A. The economie problem none ttemnnicrnin QD‘What'e the hig problem? ‘The economic problem affects every person and every organization in the world. Explain how the following situations illustrate the basic economie problem, China closes mines ‘ and warns it Local anger as an area of ancient rare-earth minerals are running cnt woodland is sold to a properly developer (China lias cut exports ol ate-eatth mi minerals to uild new homes. Europe and the United States nn ee epee to build ne Sates welermining igh eon ‘onthe mineral forthe ines i Face sytem ante ee ae ‘electronic goorts ‘earth minetale and climes Tsoct wes may be exhausted in the nex thousands of 88 Of stern lle Bosch, eS 20 year ®Ystems frm its in a be Building new schools ‘must eal a day’: Consumers on top priority" for government ‘eon i cede a‘ ‘of extra schools could have to are being for bills ‘Hundreds: reoween| = ing powss DY lt in England to cope with the schol nee ene See rganiatons aT WA comes ate sTugeO8 19 PY spectalist estar SSrmers on oe Stayer ils 2 ra) ‘essentials sill be almost Cotta ngutes suggest there ; ao recone ea 730,000 more schoo! age children by 2020 For some people thi so dene h going without aa ey a gun ment tei bil BAYES ‘medicine t0 try Athan there were as year What are factors of — The scarce resources we use up in the production of goods and services to production? tify human needs ond wonts are also known as factors of production. In addition to natural resourees, such as timber, coal and many crops, they include the penple who go to work or run business organizations and the buildings, machinery and equipment they use. All these resources of factors of production are scarce because the time people have to spend working, the different skills they have and the land ‘on which factories, shaps and homes are built ate all limited in supply and sxarve relative to our unlimited wants. Still not convinced? Just take a look at some of the real newspaper headlines on the next page. reve vemerretionoon . ier ant prone smn 10 3h Gort yurs tack, ws Factory jobs return, treprene' rage axel but employers unable N°™ Sat and other skills {0 fill them becanse of BANC for success ction" skill shortages needed for § Companies forced t 0 idk —- equipment due to impact — heavy Equipment shortage M!'S shortaye of large tyre oil exploration Economists group together diflerent factors of production under four main headings. Tana “The fertile soll vital to the growth of plant, minerals such as coal and oll, and animals for their meat and skins. are known as natural resourees, hur fo simplify ‘economists call all ofthese land. Land therefore includes the seas and rivers of the world, tres and plants, all manner of minerals from the ground, chemicals and {gases from the air and what we usually think of land (those surfaces on our planet which we use for farming or « build houses, factories and roads upon), Labour Nothing can be produced without people. They provide de physical and ‘mental effort required to design, make and sell goods and services. People who work with thelr hands and use their brains to produce economic goods and serviees provide human resources, or labour. “The size and ability of a country’s labour force are very important in determining the quantity and quality of the goods and services that can be produced. The greater the number of workers, and the better educated and skilled they are, the more a country can produce, Enterprise While most people are able to contribute to the proxtuction of gookls and services as workers and employees. not everyone can successfully combine different resources and organize production in a firm. A firm isan organization that ‘employs resources to produce and supply goods and services. ® 3.5.4 “The ability o organize production ina firm Is known as enterprise, The people who have enterprise and “business know-how” and are able to control and ‘manage firms are called entrepreneurs, They are the pople who take the risks and decisions necessary to make firms run successfully Capital to make the task of production easter, we have invented many tools: pens to write with, computers to calculate, screwdrivers, spanners, hammers, rulers and many more. On a grander scale, urbines drive engines, tractors plough, neue ttemnnicrain GDthe land, raflways and ships transport goods, lathes shape and refine metals and wood. and factories. offices and airports have heen built. All the human made resources used to produce other goods and services, are known 3 capital. Economists tend to talk of units of factors of production. For example, an ‘economist might say that ‘a firm has employed 30 more units of capital’. This ‘could simply mean that it has bought 30 new identical machines. Similarly, if an economist relers to units of land, it could mean tonnes of coal, barrels of fonide oil, o hectares of land. tikewice, emplayers ar the indivi they work are units of labour for an economist Classifying resources Below is a lst of many ofthe scarce resources that are used to produce cartons Cf orange Juice. Draw three columns and label tem natural resources, human resources and human-made resources, and then in pars decide in which column each item should go. Telephones oil Shops Advertising people Lorries Ship’ erew Cotton tor clothing Printing machines Factory buildings Fertile soil Orange tres Insecticide sprays ‘Squeezing machines Bank clerks Oranges range pickers Power stations Roads Package designers Coal Accountants Caleulators Warehouse workers Shop assistants Water lotr drivers Wood Now try Lo produce a fist of resources you tink ae used Lu produce car, Compare your list with the rest of the lass, and again sort them out into natural, human and human-made resources. ‘What are factor rewards? AL Owners of land receive rent to bring it into productive use since productive resources are scarce, fms are willing to pay money to obtain them. Rew peaple prewide thei producers of natural and human-made resources will provide them to other producers without payment. Even entrepreneurs are unlikely to set up and start firms without reward for their efforts, Tahoe fn free. Simf ly, few awners oF Factor rewards are therefore the payments different factors of production require and receive in order to participate in productive activity, Rent ‘Owners of land require the payment of rent to supply these resources to firms, for example, for the purpose of farming, producing timber or extracting fossil fuels, metal ores and minerals. Rent is also required by owners of buildings, such as office blocks, to lease them to organizations. osPeople supply their labour in retuin for wages Suppliers of capital recive interest Pris reward for enterprise Pray rere) Py Ce ad What is factor mobility? ‘Wages People will supply their labour to firms in return for payments called wages. Some people may be patd a wage for every hour they work while others may receive a wage for every task they complete. Different workers may receive very different wages depending on where they work, what job they do and the skills they nave, > 3.3.2 Interest Investments in capital goods sich as factory buildings and machinery are expensive and must be financed. The money invested or ‘employed! in capital goods by firms is therefore also called capital. Interest is paid 10 people and organizations that supply or invest capital In firms. The Interest is what the people and organizations chatge for supplying money. > 3.1.2 Profit ‘To organize production in a firm an entrepreneur must pay out rents, wages and interest 10 te suppliers ofthe factors of production it needs. These ate it costs of production, > 3.7.1 A firm must be able 10 generate enough income or revenue to cover its costs of production if ts to continue making and selling its products. A firm that canis more revenue from the sale ofits products than It costs to produce them will therefore have a surplus left over afterall it costs have been paid. This surplus is a profit. It is the reward entrepreneurs receive for successfully organizing production ina fen However, not all entrepreneurs will ean profit, Some may even make a loss if their costs exceed their revenues. > 3.7.5 Mobility of the factors of production Quantity and quality of the factors of production the economic problem can never be solved: resources will always be scarce relative to limitless hniman wants. However, changing the way in which resources are used or increasing the amount and quality of resources available «an allow more goods and services to be produced and, therelore, more wants tbe satisfied ‘But how easy ist to change how scarce resources are used? And what affects, the quantity and quality of resources available for production? Factor mobility refers to the ease with which resources or factors of production can be moved from one productive activity to another without incurring significant costs or a loss of output. Por example, factors of production may be moved: rene ttemanicrnin GD‘© Occupational mobility ‘or task mobility refers to the ability to move factors between different productive tasks Geographic mobility is the ability to move factors ‘of production to different locations. ‘Why are some factors more mobile than others? ‘© within a firm, for example, when an office assistant Is moved from the human resources department to the finance department ‘© Between firms in the same industry, for example, when one paint manufacturer closes but sells its machinery and equipment to another paint manufacturer; © Between industries, a when a worker leaves employment at a clothing firm and begins work at a car factory: ‘© Bewveen different countries, for example. when a doctor migrates to another country or when the head olfice of a bank is relocated overseas The migration of workers to a country will Increase its supply of labour but will educe the supply of labour in the countries they leave. ‘The ability to move or reallocate factors of production between different productive uses in different locations is important for a number of reasons: ‘Moving factors of production to more productive activities from less [productive acuvities will increase thett tral ourput of goods and services © 1allows different factors of production (o be moved into their best possible uses. For example, it isa waste of resources to use a trained engineer 10 clean floors in a chop, oF to use rich agric {grow food to store old vehicles for serap metal ural land that could be used to © enables firms to improve the way they produce diferent goods and services as the quantity and quality of factors of production changes. For example, moder technology has meant that some tasks previously ‘undertaken by labour can now be carried out quicker and cheaper by computerized machinery and robots allows firms to change the type of goods and services they produce as human needs and wants change. For example, concer for the environment has increased consumer demand for renewable energy: responce, recontres have heen moved inte the penductian af wind trhines and solar pancls Moving factors of production from one use to another is not always easy or without cost. For example, some workers have very specific skills, such as doctors. They may be good at providing ealdacare but may be fat les productive if they became farmers or construction workers, They would first need to be retrained and this can be expensive, 1m fact, many workers are occupationally immobile. This means they ‘cannot change jobs very easily because they have specific skills. For example, train drivers could not become lawyers overnight without years of training and shop assistants would not be able to apply for jobs as killed engineers. 1m addition, many workers are geographically immobile because they are reluctant to move to Jobs indifferent locations because of family les or because moving home can be expensive. ‘Many natural and human-made resources also have specific characteristics or functions that may limit the range of productive activities they can be used for. For ‘example, specialized asphalt-laying vehicles are designed to lay asphalt surfaces on roads and snow plough are used to move snow: They have no other use, but they ‘an be used in different locations so they are not geographically immobile‘A. Road surfacing equipments geographically mobile but ‘A. Many workers can change ob relatively easly but some have cannot be used for other productive tasks specialized sills that make them occupationally immobie, Getting mobile such a surgeons Land is also geographically immobile and, in some areas, may have few alternative uses. For example, tts dificult to build on farm wetlands, on the slopes af monintaine ar in very cold regions af the world, However, it may be possible to use land in other areas to produce dilferent crops each year or for dairy farming, to grow trees to provide wood or as parkland. It could also be built on to provide new houses or business premises but this may be costly dad Gin consuming w achieve, especially if petuission wo do sv is required from government However, many factors of production can move relatively easily between alternative productive uses. People often have many skills hey can use in ‘many different jobs in factories, offices and shops. Lorties can wansport different goods for different firms to different locations and computers and other tools and equipment can be used in many different ways. Reproduce and complete the table below. For each ofthe productive resources listed: identify what type of factor of production they ae; how their use in production is rewarded; how mobile you think they are and why (Tor example, now ‘many alternative productive uses do you think they each have and how easy do you think its to change their use?) Factor Computer programmers labour Fac ein production: Ee Wages | Ouite Although they have very specific stills and ‘mobile | cannot change occupation easily, genera! ‘computer sills are used in so many aiterent ways in different fms and industries A combine harvester Cotton ‘An il platform A woodland nenmettenanicrnin GB‘What affects the quantity and quality of factors of production? “AL New technologies can produce ‘energy from renewable sources and reduce the use of ol, 933 and coal in electricity production Some natural resources such as fossil luels, metal ores and minerals are non- renewable, because they have taken ma foun, We tay be able fad aid extras sonic Furtlier deposits over tate but ‘once they have all been used up they cannot be replaced. > 1-1-1 thousands or millions of years to However, other scarce resources are renewable. It may also be possible 10 increase both their quantity and quality over time so that more goods and ‘services cat be produced with tei. or example, more trees can be planted to increase the supply of wood. Woods and metals from old unwanted goods can also be recycled and re-used. More machines and other capital equipment can be produced instead of ‘consumer goods. New technology is also increasing the quality of capital ‘equipiien, The power and capabilities of vompucers las increased significantly in the last few decades and they are now used extensively to ‘design products and control machinery in many modem production processes. Industrial robots are also replacing the Jobs of some manufacturing workers who are then able to move into other productive uses. Population growth is increasing the global workforce and training can teach workers new skis including how to run successful firms, how to improve production and how wo reduce the amount of natural resources wasted during production. > 3.6.3 Discovering new sources of natural resources and inereasing both the quantity and quality of other factors of production available for productive tse enables firms to: "© produce more goods and services; = produce a wider sange of gous au services; + improve the quality of goods and services; ‘© inyent new products and ways of producing them, ‘Asa result, more human needs can be met and more human wants can be satisfied, We can show the impact of changes in the quantity and quality of factor resources ‘on production using production possibility curve diagrams. > 1.4.4“¥ How the quantity or quaty of a factor of production canbe Increased land + An Increase in rents may persuade more Tertlizers and better land management can landowners to release their land into improve soll conitions allowing more crops productive uses to be grown + New discoveries of fossil fuels, minerals New technologies can improve the and other natural resources ~ and new resence of plants to drought and insect {sulpment an wechmques ~ can improve Infestations the amount is possible to extract Reducing the use of chemicals in farming + Making use of other previously unused hie can potute water courses natural resources. For example. modern Using organi and more humane animal technologies have enabled us to use the | farming methads can improve the quality of sun, wind and other renewable resources | yops eat and milk produced produce energy This i reducing the amount Of ol, gas end coal we need to bur to produce electricity, + ranting and growing more trees and plants © Reeyling and e-sng uced vegetal ile and engine ols, and metal and wooden parts in durable consumer and capital {pods that we no longer use or want labour © An increase in wages may persuade more | Training and education can improve People to supply ther labour to firms workforce skills andthe amount, range and © An increase in the population of working quality of goods and services people can a produce Improvements in healthcare redes the ‘umber of days people ae absent from work due to sikness and wl help people tolive and work for longer Capital A decision by producers to produce more | © Advances in technology have improved capital goods and continue to improve, the speed and «An increase in interest payments wil accuracy of modern equipment increase the amount of capital investors are wiling to supply to firms Enterprise * An increase inthe pices consumers are More and better traning courses for people wiling to pay for goods and services may | wanting to become entrepreneurs increase profits and encourage more people ‘More and better business advice and to start firms suppor for new entrepreneurs + A fall inthe number of pai jobs available and arse in unemployment may result in more people stating up ther own businesses instead4. The ability to move factors of praduction fom one productive use or location to other (6,8) 5. Seatce resources wed to produ {8 The using up of goods ant sr human need and wants (1) ce other goods and services - tities (7,2, 10) uci eee ee eee! any to organize resources into fms forthe purpose of production (10) relative to human want (8,5) 14. Frite resources which cannot be replaced or replenished once theyhave been wed up (8, computers that can be used epeateay to fr want over many months or even yet (8, 8) ity a human need ErIm 1. Human effort used up in productive activities (6) 2. The actor rocess of using resources to make and supply goods and services to satisy human needs ard wants (10) 4 The outputs or products of productive activities (5,3, 0) ces by consumers to satity ther Any resures or products tat are unlimited in supoy (5) 7. People wth enterprize sills wh ae wing to ake te sks and decisions necessary to organize resoutes into fms For proauevon (13) 10, Payments made to the owners of factors of production in for productive ute (6,7) 11, Human desires fr diferent goods an services ~ these desires ate without limi nd are increasing (5) 12. ase human requitements fr ife and sural (8), to stist their needs and wants (9) 16 All natural resoutees used in the production of other goads and services 8) 17 Human-made resources icing machinery tt an actory tailings, use in the production of ether goods and secs (7)Opportunity cost Production possibility curves Definition of| ‘opportunity cost The Influence ‘of opportunity ‘cost on decision ‘making Lennition of| 2 production possiblity curve (Pc) Points under, on ‘and beyond a PPC Movements along PPC Shifts ina PPC Define opportunity cast Use examples to demonstrate the opportunity ost of different economic decisions Analyse how opportunity cost can affect decisions made by consumers, workers, producers and governments to allocate their resources to iiferent productive uses or activities ‘Derine ana araw a production possibilty curve (Pc) Use appropriate diagrams to demonstrate how PCS can be used to illustrate the concepts of resource allocation and opportunity cost in firms and in an economy Explain the significance of different production points on or off a PPC Evaluate movements along @ PPC and their ‘opportunity cost Identity and explain the causes and consequences Of shifts in a PPC in terms of an economy's growth onanDefinition of opportunity cost The influence of opportunity cost on decision making ‘What is opportunity cost? The central econonc problem Is that dhe resources we nee wo produce goods AESIEAN We cate PARSE Calan GeV GD ME ERA SIRE THE Chole ts necessary not only because resources are scarce but because many can be used in diferent ways to produce diferent goods and services. For example, many football clubs have spare land next to their grounds. ‘The problem facing these dubs is to choore what to do with this land. They could butlda sports complex or leisure centre o serve the local community, or a supermarket, of an apartment block or even an office complex. Whatever they do, they can only choose one of these options because land isa scarce "¥- For example, apiece of land can be used for agriculture or to bull 2 motorway on People and nations all over the world must therefore choose how scarce resources are to be used. That is, we must all choose which goods and services, we will produce and consume because we cannot make everything we want. The true cost of something is what we have to give up to get it. This cost is known as the opportunity cost. its the benefit we could have enjoyed from. the next best alternative we choose to go without, For example, in Activity 1.6 below you were asked to state what you would 50 without to purchase the items in the first column, The goods or services you listed in column two are therefore your second-best cholces or next best alternatives. You would forego their benefit in order to enjoy the items in ‘column one. For example, you may have chosen to go without the benefit of a holiday in order to buy a large lat-screen television, The benelit of the holiday you have given 1p isthe real cost of choosing to bay a large flat- screen television instead, OseOpportunity cost is the cost of choice ‘The next best thing Look at the items listed in the first column. What goods or services would you also like to have and what would you go without in order to be to able to buy them? eee | Products could go Large flat-screen televis Four-bedraom house Cakes and sweets Aticket to the World Cup Final Every decision we make either as consumers or producers involves an ‘opportunity cost because the resources we need to produce goods and services are limited in supply and scarce relative to our wants. Choosing one use of resources always means going without another. For example: © Consumers must choose how much oftheir limited incomes to save and ner chooses to save $500 they Ihave given up the opportunity to enjoy $500 of consumer goods and services instead. > 3.2.1 ‘© A family can choose to cover the floors of their home with carpets ot tiles 1 the family chooses to buy and fit carpets then it has decided to go without the benefit of tled floors. © Workers also fave many choices. For example, Rafa chose w Wain as engineer in a local lactory for which he is paid $600 per week. To do so he gave up his next best option to work as a gym instructor earning $500 per ‘Week in a local sports centre. ris supervisor inthe factory has now asked him if he wants to work an extra 10 hours each week. Ifhe agrees, he will ‘earn $200 more each week but will have to give up 10 hours of his leisure ume, > 3.3.4 ‘© Producers must decide what goods or services they will produce, how ‘much they will produce. how much money they will invest in their firms. where to locate them and howw best to obtain and orgonize the resources they need for production, > 3.6.1 For example, a group of entrepreneurs have purchased an area of land and raised $5 million to pay for the resources they need to build 20 new homes for sale ora new hotel. After considering the two proposals they decide the construction of a new hotel is thetr preferred option and the construction of new homes, the next best alternative use af $5 million of resources. This is because they estimate the hotel will be mote profable than the construction ‘and sale of new homes, They are therefore willing to give up the profits they would eam from this next best alternative use of resources. © Governments must determine haw hest ta spend public maney and how they will finance it. For example, should they spend more on providing, schools and education or on the construction of new motorways? The creme QQ‘opportunity cost of building more motorways will be the foregoing of additional schools and educational services. Alternatively. a governmet ease taxc3 on the wages of workers and profits of may decide to entrepreneurs so that is able to finance the building of more schools and ers foregone. However, the roads at the same time so that neil ‘opportunity cost of doing so for taxpayers will be the amount of moncy they must give up from their incomes to pay higher taxes. » 4.3.2, All of the above decisions involve making choices because the goods and cervices we conciime and the receuitres we nce to pte them are limited in supply and scarce relative to our wants However, scarce resources are uncvenly distributed within and between ‘countries. Some countries have more resources than others, Therelore some Cconstimers, workers, producers and governments have more choices available to them than others. Free to choose? 11 Look atthe photographs and copy the table below. Puta tick In the fist column if you think the children in the frst photograph are free to choose. Tick the second column ifthe boys in the second picture are free to choose Porn tieg ng perl Paid ture Can go toa soccer match, Can eatin a restaurant. Can catch their own food Can drive a car. Can visit foreign countries. Can own their own house Can obtain medical help when needed Can receive an Economics education Can receive a daily paper Can be independent. Can receive radio and television, 2. Which group of children do vou think has more choice and why? Based on the photographs, we assume that the boys in the second picture in Activity 1.7 have a greater choice of goods and services to enjoy than the children in the first picture, This is because the boys in the second picture live {ma country which has far more resources to produce more of the goods and services people want The children in the frst photograph have far les choice. There are fewer resources in their country that can be used to produce goods and services satisfy their wants ——Prd Pers 1m some countries, many people may have very Ihtle choice. For example, in the poorest countries of Africa. not even basic needs for food can be satisfied with the available resources. This great difference in choice is caused by the relative lack of resources in the poorer countries. Yet in both rich and poor nations people want more resources than are available. > 4.3.2 ‘The purpose of economics involves advising how best to use scarce resources in order to make as many goods and services to satisfy as many wants as possible. In other words, economics attempts to increase choice and maximize their economic welfare. When peaple have mate goodie and cerviees tn choose from, ‘opportunity costs are reduced and they are better off. For example, the Western boys are better off than the children in Bangladesh simply because they have the ability to choose between and consume more goods and services. Discuss how the two newspaper articles below illustrate the concepts of scarcity bf resources and oppurtunity wus. Fears over the development of new homes Developers have submitted plans to build total of 3.500 new homes in Northumberland ‘Tere is curently a shortage of homes inthe area The project will reate S00 affordable houses onthe outskirts of Ponteland and enhance the tven’s jafrcbrectas However, local campaigners fear the development will destroy large areas of nearby agricultural land and woodland, and increase pressure on local schools on healthcare service, ‘We are not against development", said one local resident, “We know new homes need 9 be built bt they boul! not be built upon open lad. Once it hasbeen developed its lost forever” People must choose between higher taxes or spending cuts PEOPLE IN Northern Ireland should be given an opportunity to vote on whether tv axxspt speanting cuts or pay higher ues Wo save public services, according to leading Northern Irland economist. Mike Smyth, president of an influential European Union economic think tank, believes the scale ofthe public expenditure cuts proposed by the ‘UK government will result "severe decline i vn stands Northern Irland, Homever, government officials have argued the tax rises needed to continue paying for current levels of public service provision would slo cause hardship tor many people und businesses across the region, cremePCB eet aC EEE SECTION 1.4.3 What is a production possibility curve (PPC)? Definition of a production possibility curve (PPC) Points under, on and beyond a PPC Movements along a PPC ‘The cost of making choices A factory employs 10 people and has 2 machines able to produce and pack [300 glass bottles each day. The same employees and machines could instead be used in the same factory (0 make and pack 400 glas jars each day. “The sae 10 employees used Lo work un fam and were very skilled at yroi harvesting corn until the farm was sold and the Factory was built on the farmland, ‘Compared tothe farm the factory s noisy and pollutes the air with smoke. 11 What isthe opportunity cost to the factory owners of uting the 10 ‘employees and 2 machines to make 300 bottles each day? ‘What is the opportunity cost to the employees of working in the factory? ‘What isthe opportunity cost to society of the factory? ‘The firm in the activity above can use al its factors of production to produce a ‘maximurn of 300 glass boules oF a maxtnum of 400 glass Jars each day. Using all its resources to produce 300 bottles each day will however mean that the ‘opportunity to use them to produce 400 jars instead is given up. Adaltionally the firm could also choose to allocate some ofits factor resources to the production of bottles and the remainder to the production of Jars. we can. plot all the different combinations of bottles and jars the firm can produce with its resources on a production possibility frontier or production possibility curve diagram (FFU). Y Producton possibilty curve fora firm producing glas bottles and jarsMoving along a PPC involves the reallocation of resources from one productive use to another Inefficient and unattainable allocations of resources “The production posstbility curve inthe dlagram shows all the production 1g it uses al ofits labour and other resource inputs as fully and as ficiently a3 possible to maximize their output, choices available to the fim assu At point A on the vertical axis the firm willbe using al ofits resources to produce 300 glass hottles each week. At point fit will be using al ts resources tw produce 400 glass jars each week. The upportunity cust of producing 400 jars ‘each day is therefore 300 bottles foregone. At any point on the PPC between A and B the firm will be using its resources to produce some combination of bottles and jars each week For example, ifthe firm choases to produce Jats aund 120 battles eats week, Moving from point Co D will require the firm move some of its resources out of the production of jars and into the production of bottles. Doing so will allow the firm to produce an additional 80 bottles each week but at the los af 100 jars. That is, the opportunity cost of producing an extra 80 glass bottles each week is the 100 glass jars foregone. Moving even further along its PPC from point D towards point A will mean the firm moving even mare of its resources into the production of bottles and. _sving up even more jar production. ls PPC therefore shows the opportunity costs faced by the firm when choosing between different allocations ofits ine thatthe firm fs actually producing at point x below its production ‘curve. At paint X iti producing jst 150 jars and 100 battles each week. However, we know from its PPC that it could produce 330 jars and 120 bottles each week at point C of 230 jats and 200 bottles each Week at point D, “This is hecanse at point X itis not using all ofits resources and/or not tsed them as efficiently as possible, The same will be tue of any other point of production below the PPC. For example, at point X some of its machines may be broken or they are only being used for 12 hours each day instead of being run continuously for 24 hours each day. Correcting these problems Would therelore allow the firm to increase its total output of both bottles and jars. However, it could not increase output to as far as point V above its PPC. This is because its PFC shows the maximum possible output combinations of bottles and jars the firm can achieve when all its resources are fully and efficiently ‘employed. Production at point Y or any other point above ite PPC will therefore be unattainable unless the firm is able to ether: improve the quality of is exiting resources so Uhey can produce more, for example. by training its workers to use more advanced production techniques and machinery; and/or © increase the quantity of resources it employs, for example, by hiring more workers and investing in additional machinery. > 1.2.3. cremeSe Ll countries face the ecnnomie problem andl ca choices have ta he male Explain what is meant by the economic problem. Explain two characteristics of the factor of production referred to as ‘enterprise! Using a production possibility curve diagram, analyse haw the curve can be used to show the 1-21 ‘A village or small town will have a small local economy, be part of ‘a much larger regional or even national economy. For example, Nairobi is the capital ety within the national economy of Kenya. n turn, the Kenyan ‘economy is part of the African economy in which all other Alrican countsies are included, such as Algeria, Cameroon, Egypt, Mauritius, Swaziland a South Africa, Similarly, all African national economies form part of the {global economy along with the economies of all other countries nthe world. ‘The size ofa national econom; fed by the amount or value of all the ‘goods and services it produces each week, month or year. An economy will therefore grow in size as it produces more goods and services. > 4.6.2 ‘The efficient reallocation of resources in an economy. The production possibility curve (PPC) in the diagram shows the total amount ‘of consumer goods and capital goods a national economy can produce using, scarce resources. It shows the economy has enough resources to produce 1,000 tonnes of consumer goods or 800 tonnes of capital goods. > 1-1-1 Or the economy can produce a combination of consumer goods and capital ‘goods, The maximum combined amount of the two types of goods the ‘economy can produce with its resources is shown by ils PCY APPC foran economy g Capt goods pr day For example, let us assume that the economy is currently producing 650 tonnes, ‘of constimer goods and 500 tonnes of capital goods each day. This combination of outputs is marked on the PPC diagram. “To increase its output of capital goods by another 100 tonnes each day (to 6600 tonnes) will require a reallocation of resources within the economy. Mobile factors of production will be moved out of firms producing consumer goods and no other firms proxlucing capital goods, From the PPC for the economy we can see that this will result in a reduction in the amount of consumer goods produced each day by 150 tonnes (Irom 650 tonnes to 500 tonnes). “The opportunity cost to the economy of an additional 100 tonnes of capital ‘goods is therefore the loss of 150 tonnes of consumer goods. > 1.3.2 Inefficient allocations of resources ‘The diagram below is the PPC of another national economy: Its PPC shows all, the maximum possible output combinations of consumer goods and capital ‘goods it is capable of producing when all its scarce resources ae fully and elfciently employed, However, the economy is currently producing consumer and capital goods at point A, well below what itis capable of producing shown by its production possibility curve. This means itis not using all of is scarce resources or itis not Using them in the best or most efficient ways possible For example, many workers may be unemployed while others may be in jobs they are not trained for or skilled enough to do. Farmland, factory buildings, offices, machinery and other productive resources may be unused or idle, the economy made better use ofits scarce resources it could inerease its total ‘output of both consumer goods and capital goods each year. For example, if it used all its resources effidently the economy could produce the output combination at point B or € or at any other points along its PPC. Oppornty cout (ED‘¥ An economy producing at a point A below its productive capacity Consumer gro ‘capital yo However, the economy is unable to produce output combinations D or E. These points he outside of ts PFC and therefore above the maximum possible output, ‘combinations of consumer and ca al gonds it can produce wit its existing resources, production processes and technologies. Kn increase in the quantity or quality of resources available to an economy Firms in the economy will only be capable of producing more consumer goods «and capital goods each period at points such ay D and E if they have more resources {0 use or ifthe quality of their existing resources improves so that they become more productive, An increase in the quantity and/or quality of factors of production available to the economy will move its PPC outwards (from FPC1 to FPC2) as shown below. > 1.2.3 "¥ _Anincreas in productive capacity Consumer ond rer Capital gods‘An outward shift in the PPC shows that the economy has the capacity to produce more goods each period than it did before there was an increase in the quantity or quality ofits resources. Ifthe economy uses this capacity to produce more goods than it did previously, the size of the economy will increase, This is called economic growth. > 4.6.1 reduction in the quantity or quality of resources avaflable to aneconamy In contrast, ifthe economy sulfers a decrease in the quantity or quality ofits resources, iis capacity ta produce goods will shrink. This will ese its PPC 10. shift inwards (ftom PPCI to PPC in the diagram below). Its total output of ‘goods will fall and there will be negative economic growth. < ‘A decrease in productive capacity ° Capital goodsi, ——— shift it! F pceoraing to Ue neve tie bel, which coun ate mos TRS experienced (a) an incre rence in thei resOUes and productive capacity? sein their resources and productive capacity and (8) 2 de Avrsinaey 15 psn ofnd in Unc tn fragt cording ane st oer onan 0 pret ot rand cure bing coetimatd that upto 12 ‘output has been lost duc vn ec through etl eredon and teat ines Mass migration £0 England i expected st yease the population PY ew 0 OS ton 4 mijtion in the next decade, new Bo projections susEest: ee ns iano 150ae oc experience an icreac ints resurees and producti CAPA 2 What could prevent a national economy that from increasing its total output ot goods ar services? [20] se bast econnmic problem‘An are cach 262 town ep a country in which the ‘economic sctiities of production, consumption and cechange take place ~ is size can be measured by the total amount or value of goods and services produced within it cach period 2,7), Physic! products produced and suppl by fe in an conomy to satisfy immediate consumer needs or wants 5) ‘A graphical epresenaton of Whe asa wai combinations of two goods that could be produced by afm or and as ficiently as possible (10, 1, $) actor moby is requred in an economy to move along is roduction possibility cure because it eauires reallocation of workers hae ver sec skis whieh means they cannot easiy ‘ve moved to tferent obs reauiing diferent sls, Whats this problem called? (12,10) Factor of produto wil ave tic characteritic if the ae cay to relocate (12.8) Thee pecs no stan inet ors red or want instead they ae produced ad supplied by frmsin an coremy oe in the production of ther good and zene, 6) Te basic economic problem (8, 29) The real cost of choosing one us of scarce resources ver nother Iti the benefit fom the rest best alterative given por foregone (1,8) These are pa to people to supply their labour to fms (5) The ear or enterre (8) Tis type offactr reward is reccved by the owner of land in return for its use in production 8) This will ave acured in an economy thats able to produce reat preesecceet cal peel madd eee Periods it refers oan increase nthe sie ofan economy 8 5) 3 Factor rewards recived by the owners of capital tat as been invested in firms (2) oreanaiyomAssessment exercises Multiple choice 4 Hala makes cakes she bakes inher kitchen at home, she sells them ata local market. To produce more cakes she decides to invest in a larger oven and to 1. What Is the baste economic problem? A. Finite resources and limited wants ‘employ someone to help. B_ Finke resources and unllmted wants Which factors of production have changed? C Infinite resources and limited wants, Naw, D Infinite resources and unlimited wants ee Capital B ich statement best explains why drought is an C taboariend copes 2 Which best explains why drough $ Enterprise and capital cconomie problem? ‘A. Rainfall cannot be predicted easly 7) A new dam is but in Turkey to provide B_ The effects of drought require government hydroelectric power and a water Supply. What isthe action ‘opportunity cot tothe country of building the Droughts cannot be prevented aan ™ s D_ Waters. a scarce good A. The costo households and businesses of cconsuining the water supply > Kew oll reserves are discovered. What has increased The benefits foregone from other uses of the in supply? money used to pay for the dam A. Capital © The cost to consumers of using hydroelect B Enterprise power © Labour D_ The money used to pay for the construction and D Land Hf i running of the dam 4 Which staten nt about the factors of proviuction is g 4 soxial club has sold raffle tickets at USS10 cach, correct? ‘The owner of the winning ticket received a prize of A Capital includes human-made machines that US$250, A student bought a ticket, but did not win. lose value over time to wear and advances in ‘What is the opportunity cost to the student? technology A ussio 1B Enterprise isa natural factor of production that Us§250 cannot be taught What could have been bought with C Labour is an immobile factor that does not eee change its skill level D_ What could have been bought with Land refers 0 the US$250 9 A firm can produce a number of possible 3 the following are four ways factors of production ‘combinations of two goods. 1 can either produce are used. What is likely to require the greatest use of $00 of good x and 300 of good y, oF 6O0 x and 250 y. the factor enterprise? ‘What is the opportunity cost of producing an extra A\ Acarpenter making wooden articles in his 100 of good x2 ure time for sale at a ly market x) 009 1 Aco farmer negotiating with other farmersto sn hire expensive machinery < doy © A food shop owner sometimes selling flowersin The extra wages paid to the workers the shop DA householder harvesting vegetables grown at os10 In the diagram below what Is the opportunity cost of Increasing the output of wheat from 300 tonnes to 400 tonnes per month? rf) = sé ° 720 600 Daley 7006 ‘800 tonnes af barley '80 tonnes of barley 120 tonnes of barley 720 tonnes of barley pop 11. The diagram below shows the production possibility curve for an economy. Which point in the diagram represents the most ellicient allocation of resources to the production of, both consumer goods and capital goods in the economy? D Consume goods 12 The movement in the production possibility curve from PPC to PPC2 in the diagram i hhas been growth ‘economy, What is most likely to have caused this? dicates there the productive potential of an rea Consumer gods ci ° Copal gods ‘An increase in wages A better educated workforce A dectease in the availability of natural D_ An increase in factor mobility ne> meStructured questions In 2017, a series of powerful hurricanes destroyed many homes and factories in the British Virgin Islands. Rebuilding will take time and involve aan opjorsunity cost as resources will need to be diverted from other uses. ‘Asa result. many people may decide to emigrate. A. Deine opportunity cos Py) B Explain why its impossible to solve the economic problem. i C Using a production possibility curve diagram, analyse the effect 6f a reduction in the resources available to an economy. 16) D_ Discuss whether a country will benefit from emigration. Is) In 2012, the US Government approved spending of USS1.5 billion to send a third rahotic exploration vehicle to Mars in 2020, Some economists argued that it would be better to use the same scarce resources including labour and enterprise, to improve education or to bulld more roads instead, A. Deline enterprise PI B Explain why searcity of resources creates an opportunity cost. [4] C_ Using a production possibility curve diagram, analyse the impact an increase in education could have on an economy. 61 _ Discuss whether the construction and use of more roads will benefit an economy, 5)y Microeconomies and macroeconomics “Tne role of markets in alocating resources Demand Supply Price determination Price changes Price elasticity of demand (PED) Price elasticity of supply (PES) Market economic system Market failure Mixed economic system ‘Muttipie choice Structured questions Pa remertry Choosing what goods and services to produce, how to produce them and who to produce them for, involves ‘making decisions about the allocation of scarce resources. How these decisions are made Is called an. Every country has an economic system or economy involving dedsions about the production, consumption and exchange of goods and services. in a market economic system. the spending decisions of consumers determine what, how and for whom to produce: private sector tirms seeking to earn protits will allocate roduction of goods and services for consumers with the greatest willingness and ability to pay for them, scarce resources to the In a free market the price of a good or service will be determined by the decisions of consumers to buy that product and the production decisions of firms. Elfective demand is the willingness and ability of constumers to buy goods and services. In general, 25 the price of a product tises demand will end to contract. Supply refers to the willingness and ability of producers to provide goods and services. In general, as the price of a product rises and it becomes. ‘more profitable to make. producers will expand its “apply The allocation of be-vXol tb deft) “The market for a good or service wil be in equilbyium when consumer demand for that product is exactly equal to the amount producers are willing and able to supply. At equilibrium the marker price for the product wall be table. However, if consumer demand increases, for example if incomes rise or ifthe product becomes fashionable, then the market price will tend to rise. Or supply of the good or service may increase and reduce market price, for example. ifthe cost of producing it is reduced due to technological advance, However, some producers and consumers in a market economic system may allocate scarce resources to activites that are wastelul, inefficient or even harmful to other people, the ceonomy and the environment. This is Thecause private sector firms and consumers will usually nly be concerned with their wn private costs and benefits. They may fail o take account of the external costs oftheir decisions and actions on others, includin pollution and the rapid depletion of natural resources and Habitats a mixed economic system a government cant anize resources and productive activities to help correct market failures that may otherwise reduce also o economic welfare. In a mixed economic system, resource allocation decisions are therefore taken by the government or public actor as well as by the private sector.Microeconomics and macroeconomics The role of markets in allocating resources Unit oF Capital, piece of Land, The minds of Labour and their hands, ‘Stir and stir my magic broom, ‘Aad answer the questions ‘hat, Haw and fer Whom? Pete Pte eee eee ‘What is microeconomics? ———— EERE icroconomies Macroeconomics Resource allocation decisions Introduction tothe price mechanism ee Microeconomics Macroeconomics Understand the cifference between ‘microcconomics end macrocconomics and the decision makers involved in each Establish now the economic problem creates three key questions about the allocation of resources ~ what to produce, how, and for whom ‘Understand how a market system works including the interactions of buyers and sellers, and how it determines the allocation of scarce resources Distinguish between a market equilibrium and market disequilibrium Explain how the price mechanism provides answers to the key resource allocation questions Economics involves the study of how humans work together to convert limited resontces into gaods and es te satisty asm ;ny of their unlimited wants as they can. Economics can be divided into microeconomics and Microeconomics studies the economic decisions and actions of individual consumers, producers and households and how these economic decision ‘makers interact. For example, microeconomics will consider: