UNIT 1 – Basic Economic Problem: choice and the allocation of resources
1 – Define the nature of the economic problem (finite resources and unlimited wants)
The resources we have (land, labour, capital and enterprise) are in limited quantities
However, the needs and wants we have are unlimited in nature
This leads to a scarcity of resources
So, all goods and services demanded cannot be produced, so there arises the need for choice since resources can be used in alternative ways
2 – Define the factors of production (land, labour, capital and enterprise)
Land – all the natural resources used in the production process, such as soil, farmland, coal, oil etc.
Labour – all human contribution, both mental and physical, to the production process, such as miner, mason, carpenter, clerk, accountant etc.
Capital – all the man-made resources that go into the production process, such as machinery, tools, vehicles etc.
Enterprise – the risk-taking ability of an entrepreneur who brings al the other factors of production together to produce goods and services
3 – Define opportunity cost and analyse particular circumstances to illustrate the concept
Opportunity cost is the next-best alternative foregone when a choice is made
If one chooses to do ABC with a resource (s)he cannot do DEF with it
Time/money is scarce in day-to-day life
Buying an expensive pen may be your decision, but you, in the process, might have sacrificed the opportunity to buy the MP3 player you always wanted, because money is a scarce resource, and we need to make a choice about how we need to spend it
Opportunity cost is always there whenever an economic decision/choice is made
4 – Demonstrate how production possibility curves can be used to illustrate choice and resource allocation
A, B and C are points on the PPC which show the different possible combinations in which Product A and product B can be produced simultaneously by the resources currently present in the economy
X is a point inside the curve and it shows a sate in which there is inefficiency in the economy since it is not operating at its maximum production potential (on the curve)
Y is a point outside the curve and it shows a point currently unachievable (with the current state of resources in the economy)
The PPC can be shifted outwards when economic growth takes place, due to technological advancements or an increase in the quality or quantity of resources in the economy
Once it has shifted outwards, the point Y becomes achievable (and thus the total output of the economy increases, the reason for economic growth)
If an economy decides to move from point A to point B, an opportunity cost is involved
While more of Product B is being produced the economy is ‘sacrificing’ the opportunity to produce some units of Product A, the opportunity cost
Thus, the PPC is also sometimes called an opportunity cost curve
5 – Evaluate the implications of particular courses of action in terms of opportunity cost
Look at it from these perspectives –
An individual A might decide to purchase a car, but the opportunity cost to this decision could be the long holiday with his family that he had been wanting for quite some while now
A jam producer might decide to move a few of its resources from producing apricot jam to the production of mixed fruit jam, in which case, while the output of mixed fruit jam will increase, the opportunity cost will be the loss in the production of apricot jam
A government might decide to move some of its revenue from subsidising university students to healthcare, in which case, the healthcare facilities will probably become better, but the opportunity cost to the government of this choice will be the loss in subsidy to university students
UNIT 2 – The allocation of resources: how the market work; market failure
1 – Describe the allocation of resources in market and mixed economic systems
There are three questions which every economy needs to answer –
What to produce?
How to produce?
For whom to produce?
In a market economic system, goods and services are freely exchanged
The three questions are answered by the buyers and sellers when they trade in different goods and services
All the resources are privately owned by firms or people
All these private firms aim for profit
What to produce – Since firms aim to make profits, they will move the scarce resources from the production of goods and services which consumers do not demand, into the production of those goods and services which they do demand
Therefore, only those goods and services will be produced which are demanded for by the consumer.
How to produce – Goods and services will be produced in the cheapest possible method, either labour-intensive (in countries with large populations) or capital intensive (in countries where capital is easily available)
For whom to produce – Goods and services will be produced for those who can afford to pay for them
In a mixed economic system, there are two sectors – the private sector, consisting of privately owned firms (as in a pure market system), and the public sector which is run by the government
The private sector looks to make the greatest possible profits while the public sector utilises the scarce resources to benefit society in general
Resources are owned both by the government and by private individuals and organisations