IGCSE Economics
Unit 1 – The Basic Economic Problem
and Factors of Production
What is Economics?
Economics is the study of choices leading to best possible use of
scarce resources in order to best satisfy unlimited human needs and
wants.
HUMAN NEEDS AND WANTS
• Needs are the things that we require for
survival. These needs are finite
Examples:- food, clothing, shelter
• Wants are the additional things that
people would like to have but not essential
for survival. Wants are infinite.
Examples:- car, mobile , jewellery
FREE GOODS AND ECONOMIC GOODS
Free good is a good that is not scarce (unlimited in supply) and
is available without limit like air and sunlight.
•Are available and abundant in nature
•Does not require human efforts to produce
•Has no money value or price
•Does not reduce availability for others.
•They are gifts of nature
Economic goods are those which have a price and their supply is
less in relation to their demand or is scarce e.g. table, chair,
stationery
•Demand is higher than supply and availability
•Requires human efforts for production
•Has a money value or price
• Reduces availability for others.
•They are not gifts of nature
Satisfying Needs and Wants
• In order to satisfy the needs and wants of
consumers businesses will make PRODUCTS
• Products are categorised into Goods and Services
• Goods are tangible/visible
• Services are intangible/invisible
• In order to make Goods and Services resources
are required
CONSUMER GOODS AND CAPITAL GOODS
CONSUMPTION:- Using up goods and services
(products) to satisfy consumers’ needs and wants.
CONSUMER:- The people or organizations which
buy goods or services to satisfy their needs and
wants.
CONSUMPTION EXPENDITURE:- The amount
consumers spend each period on economic goods
or services.
EXCHANGE:- Trade (buying and selling)
PRODUCERS:- The people and organizations
which make and sell goods and services .
Production
Using inputs (resources) to make outputs (goods and
services) to satisfy the needs and wants of consumers.
renewable resources (sunlight,air) and non renewable
resources (oil, coal, [Link] or iron):-
What resources are needed to
make this pencil?
Why are each of these factors of production
important?
Land Capital
Good or
Service
Labour Enterprise
FACTORS OF PRODUCTION
Land - all natural resources, including agriculture and non
agriculture land as well as everything that is under or above the
land such as oil, minerals, water, forests etc.
Labor – all human resources, includes all mental and physical
efforts made by individual such as teachers, construction workers
etc
Capital - all man-made resources/ factor of production that is used
in the production process to produce goods and services such as
buildings, machinery and equipment.
Enterprise - the skill or ability of taking risk to provide goods and
services and make profits.
Payments(factor
12
rewards) and
owners for
Resources
Task – sort these resources for making and selling
orange juice into the 4 factors of production
• Fertile soil • Telephones
• Squeezing machines • Advertising executives
• Orange Pickers • Shops
• Packaging machines
• Ships Crew
• Package designers
• Calculators • Factory Buildings
• Water • Drinks tasters
• Oil • Insecticide sprays
• Lorries • Oranges
• Printing machines
• Roads
• Orange Trees
• Power Stations • Accountants
• Coal • Shop Assistants
• Warehouse workers • Dock Workers
• Lorry drivers
• Wood
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 cost or loss of output.
Factors of production may Advantages of factor mobility:-
be moved :- 1. Moving factors from less productive
Within firm to more productive activities will
Within industry increase output for firms.
Between industries 2. It enables firms to improve the way
Between countries they produce different products as
quality and quantity of factors of
Types of factor mobility:- production changes.
1. Occupational mobility [Link] allows firms to change the types of
2. Geographic mobility goods and services they produce as
human needs and wants changes.
4. Better use of resources can be made.
Occupational mobility is when a resource is able to
change tasks, such as a labourer going from being an
electrician to an electrical engineer.
Geographic mobility is when a resource is able to
move from one location to another. This can either be
regional, national or international. For instance, a
robot, which is a factor of capital, could be moved
from India to China.
What affects the quantity and quality
of factors of production?
Increase in quantity and quality of factors of
production enables the firms to :-
•Produce more goods and services
•Produce a variety of goods and services
•Improve the quality of goods
•Invent new products and ways of producing them.
This is called…..
The Basic Economic Problem
Human wants are unlimited but resources are limited
Scarcity is a condition in which available resources are not enough
to produce everything that human beings need and want.
Opportunity cost
• Anytime we need to make a choice...the alternatives
we don’t chose has a cost. The true cost of something
is what we have to give up to get it.
• Opportunity cost refers to the next best alternative
foregone when a decision is made.
Examples: think of ??
• Opportunity cost and consumers: Consumers are
the buyers and users of goods. They have to decide
which product to buy.
• Opportunity cost and workers: Undertaking one
job involves an opportunity cost
• Opportunity cost and producers: Produces have to
decide what to make
• Opportunity cost and government: Government
has to decide its expenditure of tax revenue on
various things
Five major assumptions underlie the
PPC
• All resources of land, labour, capital and enterprise are
fully utilised and producing the maximum amount.
• The economy is efficient, meaning that resources are used
in the least costly manner.
• The chosen production combination of the two goods or
services is the one most desired by society.
• All resources are being devoted to just these two goods or
services. Traditionally, the PPC examined the production
of either consumer or capital goods.
• Finally, technology and productivity do not change.
18 more trucks
MOVEMENT ALONG THE PPC (the efficient and inefficient
allocations of resources in the economy)
•Point A,,B,C,D,E are the efficient
allocation of resources and
movement along the PPC on these
points need reallocation of resources
from the production of one type of
good to other ( to do this resources /
factors of production should be
mobile.)
•At Point F there are unemployed
resources/ resources are used
inefficiently
•Point G is unattainable with existing
resources and technology
SHIFT IN PPC
An Increase in productive capacity:- The PPC will move outwards
due to increase in quality and/ or quantity of factors of production.
A decrease/ reduction in productive capacity:- The PPC will move
inwards if the economy suffers a decrease in the quantity and/ or
quality of factors of production, its capacity to produce will shrink
Task:-
Define the following terms:-
[Link]
[Link] growth
[Link] economic growth
[Link] along the PPC
[Link] in a PPC