BASIC ECONOMIC
PROBLEM
LEARNING
OBJECTIVES
• The fundamental nature of economics - unlimited wants
and scarce resources and the need to make choices
• The three questions related to the economic problem and
its implications for an economy
• A definition of opportunity cost
• Production possibility frontiers and their relevance to the
concept of opportunity cost
WHAT IS ECONOMICS?
Economist, Lionel Robbins (1935),
Eco o ics is a scie ce hich studies
human behaviour as a relationship
between unlimited end and scarce
ea s hich ha e alter ati e uses
THE ECONOMIC PROBLEM
Unlimited Wants
Scarce Resources –
Land, Labour, Capital
Resource Use
Choices
BASIC ECONOMIC
PROBLEM
Contradiction between limited
resources and unlimited
human wants
The difference between scare
resources and overloading
demand for economic goods
Choices have to be made
when allocating resources
between competing uses
ECONOMICS PROBLEM
All societies face the problem of having to decide:
1. What goods and services to produce:
- Does the economy uses its resources to operate more hospitals or hotels?
- Does the National Health Service provide free IVF treatment for
thousands of childless couples?
2. How best to produce goods and services:
- Should school playing fields be sold off to provide more land for
affordable housing?
- Or are we contributing to the problem of obesity by selling off these
playing fields?
3. For whom to produce goods and services:
- Who will get expensive hospital treatment - and who not?
- Should there be a minimum wage? If so, at what level should it be set?
PPORTUNITY COST
Highest valued option
foregone
Exists whenever
choices need to be
made
SECTORS OF PRODUCTION IN THE
ECONOMY
Primary sector:
Extraction of natural
resources
e.g. agriculture, forestry,
fishing, quarrying, and mining
Secondary sector:
Production of goods
e.g. motor manufacturing,
food processing, furniture
making
Tertiary sector:
Provide services
e.g. banking, finance,
insurance, retail, education,
travel, tourism
Quaternary sector:
Information processing
e.g. education, research
and development,
information technology
OBJECTIVE OF ECONOMIC ACTORS
Consumers:
Rational decision makers
Maximise own satisfaction
Use limited income to but goods
and services which yield the
highest possible level of utility
Face problem of scarcity
Producers:
Rational decision makers
Maximise own welfare
Use limited resources to produce
goods and services which yield the
highest possible profit
In reality, pursue objectivities
different from pure profit
maximisation
Government:
Maximise welfare of the citizens of their
country
Act in the best interest of all
Not immediate obvious what are the
cost and benefit of a decision
No consensus about what value to put
on the gains and losses of different
groups
The medium between producers and
consumers
PRODUCTION POSSIBILITY
FRONTIER (PPF)
PPF shows the combinations of two or more goods that can be
produced using all available resources efficiently.
No ideal point on the cur e
Any point inside the curve – suggests resources are not being
utilised efficiently
Any point outside the curve – not attainable with the current level
of resources
Useful to demonstrate economic growth and opportunity cost
PPF is drawn as concave to the origin
Point X unemployed resources or
when the economy uses resources inefficiently.
Points C, A or B all resources in economy are fully employed
Point D unattainable at the moment
Reallocating scarce resources from one product to
another involves an opportunity cost.
Increase output of capital goods (i.e. a movement from point A to point B)
then fewer resources are available to produce consumer goods
As opportunity cost of switching resources increases –
i.e. give up more of consumer goods to achieve gains in the output of
capital goods
PPF shifts outwards
E pa sio of ou tr ’s produ ti e pote tial
Long-term economic growth
Increase in efficiency and productivity
more can be produced with given resources
Advanced technology and innovation
improve production progress
Improved Technology in the computer industry
• assumed to affect the notebook computer producers only
• An outward shift of the PPF
the opportunity cost of producing notebook computer has fallen.
• With same resources allocated to other goods,
greater output of notebook computer is possible
PPF shifts inwards
Co tra tio of ou tr ’s produ ti e pote tial
Deep economic recession
( insufficient investment, business close,
unemployment)
Early retirement, delayed entry into
labour market by students
Over-exploitation of renewable
resources
War and natural disasters
POSITIVE AND NORMATIVE STATEMENT
Economics is concerned with 2 types of investigation
Positive Statement Normative Statement
objective statements dealing subjective statement with
with matters of fact or they value judgments
question about how things
actually are cannot be supported or
without obvious value- opinion about how
judgments and emotions economics and market
should work
can be proven to be true or
false contain ords like should
and ought
can be supported or refuted
by evidence
EXAMPLE OF POSITIVE
STATEMENT:
“The UK economy is currently operating on its
produ tio possi ilit ou dar
Lower taxes may stimulate an increase in the active
la our suppl
A national minimum wage is likely to cause a
contraction in the demand for low-skilled la our
EXAMPLE OF NORMATIVE
STATEMENT:
“The decision to grant independence for the Bank of
E gla d is u ise a d should e re ersed
The government is right to introduce a ban on smoking in
pu li pla es.
The level of duty on petrol is too unfair and unfairly
pe alizes otorists.
The government should increase the national minimum
wage to £6 per hour in order to reduce relative poverty.
SCARCITY AND
ECONOMICS
Scarcity (the bad news): we can’t reach all of our goals; there
aren’t enough resources.
Economics (the good news): we can get the most from the
resources we do have.