Learning Objectives

Students will understand:

• The problem of scarcity – where there are unlimited wants but finite resources.
• The distinction between renewable and non-renewable resources.
• The importance of opportunity costs to economic agents (consumers, producers and government).

Content

The Economic Problem

Human Needs: The minimum that is necessary for human survival. They are FINITE

Human Wants: Desires for non-essential consumption. They are INFINITE

Problem: Resources are scarce (Finite). However, since human wants are unlimited choices must be made as scarce resources have to be allocated between competing uses.

The Basic Economic Problem: SCARCITY (there aren’t enough resources to meet everyone’s wants)

Three fundamental choices that must be answered to solve the Economic problem:

• WHAT is to be produced?
• HOW is production to be organised?
• FOR WHOM is production to take place?

Examples: Choices for different economic agents

Opportunity Cost

Opportunity Cost: The benefit lost from the next best alternative forgone.

Assumptions: Available choices can be ranked in terms of the benefits to be gained. One choice will be the “best” and the others are given up.

Example: If you can choose your favourite of the below chocolate bars, the opportunity cost is the value of ONLY your second favourite (not all three you don’t choose).

NB: OC not just in terms of £s, but also what we have ‘forfeited’ when making our choices.

‘No such thing as a free lunch’

A popular phrase which the free-market economist Milton Friedman applied to the concept of opportunity cost.

Economic Good: A good which has an opportunity cost.

Free Good: where there is no opportunity cost. This as there is zero degree of scarcity, but abundance. Free goods cannot be traded because nobody would ever pay for them– there is no point. (air, wind, sea). Nothing must be foregone to consume them.

Linked Article

See workbook for learning tasks.

Factors of Production

Factors of production (FoPs): The resources used in the production of goods and services.

The factors of production are also known as: factor inputs (or simply inputs) and resources.

Four Types:

• Land
• Capital
• Labour
• Enterprise

Land

Land: Raw materials used to make goods.

All natural resources below the earth, on the earth, in the atmosphere and in the sea – not just the ground!

Land is either renewable or non-renewable.

Non-Renewable: a natural resource which cannot be replenished (produced, grown or generated) E.g. include Coal, Oil, Gold, Gas and Copper.

Renewable: resources replaced by natural processes consequently they can be used and replaced. E.g. fish, forests, wind, solar power.

Renewable resources can be either sustainable or unsustainable.

Sustainable: replaced by natural processes at a rate comparable or faster than its rate of consumption by humans. They can be used and replaced, Rate of replenishment > rate of use. E.g. wind, solar power and sometimes fish/ forests.

Unsustainable: resources which are diminishing over time due to economic exploitation. Rate of replenishment < rate of use. E.g. some fishing/ forests.

Capital

Capital: Man-made resources used in production of other G&S.

Examples: Machines, roads, factories, schools, office blocks, etc.

Financial capital refers to money that will be used by a firm to purchase resources later on.

Capital is either fixed or working.

Fixed Capital: Includes factories, offices, machinery. Fixed in the sense that it will not be transformed into a final product.

Working Capital: Includes raw materials, semi-manufactured and finished goods waiting to be sold.

Labour

Labour: Human Input into the Production Process.

Labour can be skilled or unskilled, educated or uneducated.

Human Capital: an individual’s level of skills, qualities and qualifications.

Enterprise

Enterprise: Providing the initial ideas and taking risks with their own money.

The entrepreneur organises the other 3 Factors of Production.

Examples: Bill Gates, Jeff Bezos, a trader selling fruit and veg at a market

Factor Incomes

Factor incomes: The income derived from selling the services of the factors of production

• Rents: Income from selling/leasing natural resources
• Interest: Income generated by the use of capital
• Wages: Income as a reward for labour
• Dividends: Income that goes to the entrepreneurs

Factor Intensity

Capital intensive: Firms which use a higher proportion of capital than labour.

Labour intensive: Firms which use a higher proportion of labour than capital.

Presentation

Workbook