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Chapter 1 The Basic Economic Problem

Chapter 1 discusses the basic economic problem of scarcity, where finite resources cannot satisfy unlimited human wants, leading to essential questions about production, allocation, and resource use. It outlines the factors of production—land, labor, capital, and enterprise—and introduces the concept of opportunity cost, illustrated through examples. The chapter also explains the production possibility curve (PPC) and its implications for economic efficiency and decision-making regarding capital and consumer goods.

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21 views8 pages

Chapter 1 The Basic Economic Problem

Chapter 1 discusses the basic economic problem of scarcity, where finite resources cannot satisfy unlimited human wants, leading to essential questions about production, allocation, and resource use. It outlines the factors of production—land, labor, capital, and enterprise—and introduces the concept of opportunity cost, illustrated through examples. The chapter also explains the production possibility curve (PPC) and its implications for economic efficiency and decision-making regarding capital and consumer goods.

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a417172496
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 1 the basic economic problem

1.1 the nature of the economic problem


 Finite resources and unlimited wants
Scarcity: the resources are limited relative to the unlimited human wants.
1. Wants and needs
(1) Needs: things needed for survival. e.g. food, water, heat, shelter and clothing
(2) Wants: people would like to consume goods not just for survival
2. Resources: inputs available for the production of goods and services
3. Continuing: The growth in wants is exceeding the growth of economic
resources
Basic questions: what to produce, how and for whom?
1) What to produce? Because we cannot produce everything, we need to decide what to
produce and in what quantities.
2) How to produce? (Produce mechanism) How we can use the resource to get the best
outcomes. That is, to get the best use of the resources available to us.
3) For whom to produce? We need to decide how to allocate the products. Whether
everyone gets the equal share of what produced, or someone gets more than others?

 Economic and free goods


Economic goods: requires resources to produce it and therefore has an opportunity cost. e.g.
almost every thing
Free goods: does not require any resources to make it and so does not have an opportunity
cost.
e.g. sunshine, sea water, air

1.2 The factors of production


 Factors of production: resources used to produce goods and services
-Land: natural resources in an economy.
E.g. forest, water, river, fish; coal, oil, mineral deposits;
Reward: rent
-Labor: human resources in an economy. Including physical and mental efforts.

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E.g. cleaner, teacher, banker, doctor;
reward: wage
-Capital: man-made aid to produce other things.
E.g. tools, factory building, machinery.
reward: interest
-Enterprise: individuals who organize other factors of production and take risks.
Reward: profit

 Factors mobility: the ease of resources transmitted from one production to another.
-Occupationally mobile: capable of changing use
-Geographically mobile: capable of moving from one location to another.
Short essay

1.3 Opportunity cost


Opportunity cost: the next best alternative forgone
e.g. you were given a $15 gift voucher for your birthday. You can either buy a new DVD that
costs $15 or two paperback books for $7.5 each.
The opportunity cost of the DVD is the two paperback books.

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1.4 Production possibility curve (PPC) diagrams
 Production possibility curve: the maximum output level that an economy can achieve
using its existing resources in full.

Points on PPC: all resources are used efficiently


Points inside PPC: 1) not all resources are used (unemployment);2) resources are used
inefficiently
Points outside PPC: not achievable/ attainable

 Movements along the PPC can show the opportunity cost

From C to D, the economy chooses to produce

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more manufactured goods less non-manufactured goods. The opportunity cost of the extra 5
manufactured goods is 10 non-manufactured goods.

 Factors shifting PPC


1) Quantity of resources increases
land: reclamation, natural disaster, war
Labor: population size, retirement age, net immigration, female participant rate,
Capital: investment from firms
Enterprise: privatization, lower taxes on corporate profit, deregulation
2) Quality of resources: productivity
Land: fertilizer, pesticides, irrigation, drainage
Labor: education and training, financial and non-financial motivation
Capital: advances in technology
Enterprise: education and training

 Curved vs. straight line


 Straight line: Constant opportunity costs
 Curved shape: Increasing opportunity costs
 Why opportunity costs increase?
 Not all factors of production are equally
suited to the production of both products

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 Choices between capital goods and consumer goods
 Capital goods: used by businesses to produce other goods and services
 Consumer goods: used by consumers and have no future productive use
 More resources devoted in producing capital goods >> productivity >> economic
growth
 Less resources devoted in producing consumer goods >>a fall in current living
standards

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Exercise

0455/22/O/N/23

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