The Basic Economic
Problem
Choices and the allocation of resources
Section 1
Learning Objectives?
The problem of unlimited wants and finite resources.
The distinction between renewable and non-renewable
resources.
The use of production possibility frontiers to depict opportunity
cost,
Economic growth and the efficient allocation of resources.
The use of marginal analysis in depicting opportunity cost.
The distinction between movements along and shifts in
production possibility frontiers, and their possible causes
The basic economic problem The economic problem:
there are limited
Resources are scarce and we have resources and unlimited
limitless wants wants
There are some who think that oil will
Watch first few
run out in 40 years minutes of this video
Oil is a scarce resource https://www.youtube.
Oil isn’t the only scarce resource – com/watch?v=WiNtrO
S88rs
other commodities like aluminium,
copper, lead, tin, zinc and timber might
also get used up if we continue to
consume them at the same rate as we
are doing today
How do we manage to make these
last?
This is the central problem that we
study in economics
Factors of Production Factors of
When we talk about resources we are Production – Land,
labour, capital and
talking about land, labour, capital and enterprise
enterprise
These are also called factors of
production
Land – the land itself, sea, forests, soil,
minerals such as coal and oil – anything
that is a natural resource
Labour – the people that work to make
goods and services
Capital – the man made resources that
help to produce goods and services such
as factories, equipment, computers etc
Enterprise – people that manage and
control the firms that make the goods and
services
Renewable vs Non-Renewable
Non-renewable resources such as coal, oil, gold and copper are all
land resources that once used will never be replaced
Renewable resources are also land resources but they can be
replaced e.g. fish stocks, forests or water
Key
Production Defin
ition
!
Using inputs (resources) to make outputs (goods and
services) to satisfy the needs and wants of consumers
The satisfaction of human wants Needs– any
There is a difference between needs and resource that is not
scarce e.g. air
wants
Needs are those things that people need Complete Activity 1.2 P7
to have to survive e.g. water
Wants are things that people can do
without but make life more enjoyable
Key
Consumption Defin
ition
!
When we eat we are consuming food
When we watch television we are Consumption - Using up
consuming electricity goods and services (products)
The people who buy goods and services to satisfy consumers’ needs
to satisfy their wants are known as and wants
consumers and their
spending is called
consumption expenditure
Some people can produce a
number of their own goods
and services (e.g. grow veg in the garden)
For the rest they must engage in trade or
exchange
To do this they go to work to earn money
They exchange the money for the goods
and services
Goods and Services
Economists group different products into
four categories
Consumer goods and services – any good
that satisfies consumer wants
Consumer durables – last a long time like a car
Non durables – must be used quickly like food
and drink
Capital goods
Man made resources that help produce other
goods and services
Public goods and merit goods
Public goods are provided by government
because everyone benefits from them and no
private company would produce them e.g.
defence, street lighting etc
Merit goods – government provides because
private companies don’t provide enough – e.g.
healthcare or education
Back to………
The basic economic problem
Human wants are unlimited but resources are scarce
So, we all have to make choices
There is a limited amount of resources such as raw materials,
machines, factories and skilled workers. But there are a number
of different ways in which they can be used.
CHOIC CE
E C HO I
Resource allocation therefore involves deciding how best to use
scarce resources to satisfy as many needs and wants as possible
Key
Opportunity Choice Defin
ition
!
If you have a limited amount of money you have Opportunity cost – the cost
to make a choice as to what you spend it on of the next best alternative
Government has to do the same foregone
The cost of something is what we have to give
up to get it (the next best alternative)
Complete $100bn
$100 activity 1.6
P12
Food? Entertainment? Defence? Health care?
Clothing? Roads?
Production possibility curves
Op
p
cos ortun
t
Because resources are scarce of t – the ity
h
alte e nex cost
and have alternative uses, a
fore rnativ t best
decision to devote more gon e
e
resources to producing one
product means fewer
resources are available to
produce other goods
We can use a PPC to illustrate
this
This firm can make 100 cars
per week or
120 trucks per week
Combinations are plotted on
the PPC
Production possibility curves
Op
p
cos ortun
t
What is the opportunity cost of of t – the ity
h
making 120 trucks? alte e nex cost
For the firm to make 120 trucks it fore rnativ t best
gon e
has to give up 100 cars e
What is the opportunity cost of
making 100 cars?
It has to give up 120 trucks so that is
the opportunity cost
If this firm is producing at point A
and it wants to produce 18 more
trucks what is the opportunity cost?
10 cars
If the firm is at point B and wants to
produce 10 more cars what is the
opportunity cost?
18 trucks
Production possibility curves
A PPC of an economy shows the maximum Op
p
amount of goods an economy can make cos ortu
n
using all of its factors of production of t t – th ity
e
alte he ne cost
x
What is the opportunity cost of for rnativ t bes
producing 15 more tonnes of consumer ego e t
ne
goods?
What is the alternative?
The capital goods
To make more consumer goods you have to
give up capital goods
To go from 50 to 65 consumer goods you
have to go from 60 to 50 capital goods
You are giving up 10
The opportunity cost of making 15 more
tonnes of consumer goods is 10 tonnes of
capital goods An economy producing consumer
goods and capital goods
Production possibility curves
• Production possibility curves (PPCs) show the maximum
combined output of two or more products a firm or an entire
economy can produce with its available resources
• Resources are being used efficiently if they are producing their
maximum output
• But, because resources are limited, producing more of one
product means producing less of another
• PPCs are therefore a useful way of showing the opportunity cost
of producing more of one product in terms of how much of another
must be given up
The concept of the margin
• Margin = a point of possible change
• At the point C the economy could produce more manufactured
goods but it would need to give up non-manufactured goods
• The marginal cost of producing 5 more units of manufactured
goods would be 10 fewer units of non-manufactured goods
(shown by the movement from C to D)
Economic growth
At point F resources are not being efficiently as possibly
A movement from point F to a point on the PPB would not
represent economic growth – just a better use of resources
Economic growth can only be represented using a shift of the
PPB like in the diagram on the right
Growth can happen for two reasons
An increase in the quality of factors of production
An increase in the quantity of factors of production
