THE BASIC ECONOMIC
PROBLEM
SCARCITY, CHOICE AND
OPPORTUNITY COST
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DAVID AKO (DE MEANEST)
The Basic Economic Problem
Key Lesson Objectives
Differentiate between needs and wants
Explain the basic economic problem
Define opportunity cost and illustrate the
concept with examples
Identify and explain the classification of
resources in economics
Define economics
Discuss the importance of studying economics
Use PPF to illustrate the concept of
opportunity cost
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Needs and Wants
Needs the necessities of life e.g. Food,
clothing, shelter, warmth, medical care
Wants those things that make life
enjoyable and pleasurable e.g. Designer
clothes, cars, mansions
Class Discussion:
Do needs and wants change over time?
Why is man never satisfied with material
possessions?
Human wants are
infinite/insatiable/unlimited
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Every need or want can be satisfied
through the consumption of a good or
service
Goods and services are produced with
resources ( factors of production) which
are finite and have alternative uses.
The Basic /Fundamental economic
problem is the scarcity of resources
relative to human needs and
wants
a. Finite resources vrs infinite needs and
wants
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Economic Resources
These are the factors of production that are used to
produce goods and services.
Land all natural resources that are used to produce
goods and services E.g. rivers, forests, mineral
deposits, etc. (receives rent)
Labour physical or mental human contribution
towards production. E.g. nurses, doctors, teachers,
labourers (receives wages/salary)
Capital man made resources that are used to
produce goods and services . E.g. machinery,
buildings, computers etc.(receives interest)
Entrepreneur the individual who takes risk by
employing other resources to produce goods and
services. E.g. Bill Gates, Steve Jobs, (receives profit)
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Structured Questions
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Choice and Opportunity Cost
Choice is imperative because of scarcity
The exercise of choice implies the sacrifice or
forgoing of some other need or want
Opportunity cost is the next best
alternative forgone when choice is made
or
The benefit that could have been
derived from the next best alternative
use of a given resource
Discussion
When will opportunity cost be zero?
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Structured Questions
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Classwork
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Homework
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Opportunity Cost and the Production
Possibility Frontier
The PPF is a curve that shows the various
maximum possible combinations of any two
goods that can be produced in an economy
given full employment
Assumptions of PPF
a. There is full employment
b. The economy produces only two goods
c. There is a fixed resource endowment(limited
resources)
d. Technology is constant
e. Resources are occupationally mobile
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Illustration of PPF
An economy can produce capital goods
and food as illustrated in the table below:
Option
Capital Goods
(tonnes)
Food
(tonnes)
125
100
50
75
100
50
150
25
200
250
These combinations of output can be
illustrated as follows
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Capital Goods
X
125
100
75
F
C
50
D
J
25
0
Y
50
100
150
200
250
Food
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What is the opportunity cost of increasing food
production from 100 tonnes to 150 tonnes?
How much food must be given up if production of
capital goods is increased from combination D to
combination B?
Why is point F unattainable?
Note:
a. opportunity cost is measured by the slope/gradient
of the PPF
b. The PPF above has a constant slope. Why is this so?
. Why is point J an inefficient combination?
. Any combination of output that lies on the PPF
indicates efficiency in the allocation of resources
. Any combination of output that lies within the PPF
indicates inefficiency it the allocation of resources
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Food
How does the slope of a concave PPF
change as increasing quantities of one
good is produced?
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Shifts in the PPF
Causes
a. Technical progress technological
advancement
b. Increased productivity (efficiency) of
labour
c. Increased capital investment
d. Discovery and exploitation of new
resources
e. Reallocation of resources
f. Producing in accordance with
comparative advantage
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