Section1

Chapter 1

The nature of the economic problem

1.Needs:

Needs are the things essential for survival. For example, food, clothing, water, shelter and
air.

2.Wants:

Wants are things that human beings desire but are not important for our survival and we can
live without them. For example, going on an expensive holiday, owning a 57 inches Plasma.
Wants are unlimited and are continuously increasing.

3.Resources:

The inputs that are used in the production process to produce goods and services. These are
also called Factors of Production. Resources are limited.

4.Scarcity:

A situation where unlimited wants exceed scarce resources. Scarcity arises as people’s wants
are infinite whereas the resources used to satisfy the wants are finite and have alternative
uses.

5.Economic Problem:

Scarcity of resources is the basic economic problem facing all economies. It arises as
unlimited wants exceed scarce resources.

6.Factors of Production:

Factors of production (or productive inputs) are the resources employed to produce goods
and services. They are limited in supply. They can be classified as Land, Labor, Capital and
enterprise.

Land: All natural resources that are provided by nature such as fields, forests, oil, gas,
metals and other mineral resources. The payment for land use and the reward of a land is
rent.
 Labour: Human effort, both mental and physical used in production of goods and services
is known as labour. The reward for labour is wages. Eg. Workers, engineers, teachers,
nurses.

Capital: Human-made goods which are used in the production of other goods and services
are known as capital. These include machinery, tools and buildings. The reward for capital is
interest.

Enterprise: The skill and risk taking ability of the person who brings together all the other
factors of production together to produce goods and services. Usually the owner or founder
of a business. The reward for enterprise is profit.

7.Economic Good: Any good that requires resources to produce it is known as economic good.
It has an opportunity cost. eg. Car, mobile, clothes

8.Free Good:

Any good that does not require resources to produce it is known as a free good. It is provided
freely by nature and does not have an opportunity cost.eg. air, Sunshine, water in the rivers.

9.Consumer Goods: These are products which are bought to satisfy a human needs and wants.
They are bought by the end user, the consumer.eg car, mobile, food
10.Consumer Durable Goods: These are goods that do not have to purchased frequently as
they last for a long time. Eg car, television, washing machine, furniture, books

11.Consumer Non-Durable Goods: These goods are purchased for immediate consumption
and don’t last longer. Food products, medicines, Toothpaste, Soap, beverages, petrol

12.Capital Goods/ Producer goods: Goods which are used to make other goods and services
are known as capital goods. Machinery, tools, delivery van.
 Factors of production
Factors of production are the economic resources which are used to
produce goods and services and they are limited in supply.
• Land
• Labour
• Capital
• Enterprise
 Land

Land covers all natural resources used in production.

They are the gifts of nature available for production.
Land includes the earth itself, what is beneath land, such as coal, what is
on land, such as trees and what is found in it, eg. fishes.
 Land is occupationally mobile

Land can be used to build factories Land can be used to build a school
Land is occupationally mobile which means it can be used for a number of purposes. Eg. Wood from
the trees can be used to build tables or houses.
Land is geographically immobile
Land in its traditional sense cannot be shifted from one
location to another but in a broader sense raw material and
wild life can be moved from one place to another.

Reward for land is Rent

Quality of land
• Fertilizers can increase the fertility of land so production of crops can
increase.
• Rivers can be purified which will lead to healthy fish and cleaner water for
irrigation leading to increase in output of fruits and vegetables.

Quantity of land
Soil erosion can reduce supply of land
Land reclamation can increase supply of land
Increased extraction and discoveries will increase supply of natural resources.
Depletion and over exploitation will decrease supply of natural resources.
 Labour
Labour covers all human effort both mental and physical involved in the
production of goods and services
Occupational mobility of labour
• This means capable of changing jobs.
• Lack of information about jobs may lead to occupational immobility of
labour.
• Lack of appropriate skills and qualifications may lead to occupational
immobility of labour.

Geographical mobility of labour

• Is the ability of labour to move from one place to another
• Family ties may restrict geographical mobility of labour
• Lack of affordable housing
• Lack of information about appropriate job opportunities.
• Restriction in movement of workers
Reward for labour is Wages
Quantity of labour
• Is influenced by number of workers
• Number of hours for which they work
Number of workers depends on:
• The size of the population
• The age structure of the population
• The retirement age
• The school leaving age
• Attitude to working women

Labour force/Workforce
Those people who are working and those who are seeking work form the labour
force.
 Quality of labour
• Better education and training can improve the quality of labour
• A more experienced workforce
• Better healthcare
• Advanced technology and complex machinery and equipment
Productivity
Output per factor of production in an hour.
Labour productivity
Output per worker per hour.
 Capital
• Capital is any man made goods used to produce other goods and services.
• Eg. Machinery, factories, offices, tools
• Capital is also called capital goods/ producer goods.
 Train

Building
Occupational mobility of capital
• Some capital goods are occupationally mobile which means they can be used for
different purposes.
• Eg. A delivery van can transport books as well as clothes.
• Some capital goods are not occupationally mobile since their use cannot be
changed as they are made for a specific purpose.
• Eg. A printer, or a photocopier.

Geographical mobility of capital

• Some types of capital goods can be transported from one place to another. Eg. A
printer or a computer can be transported from one branch to another.
• Some capital goods are geographically immobile as they are in a fixed position
and cannot be shifted.eg. A building, a dockyard.
 Quality of capital
• Advances in technology improve the quality of capital goods enabling them to
produce increased output.
• Eg. Robots in production of cars has improved quality of cars produced.

Quantity of Capital
• Quantity of capital is influenced by investment.
• Depreciation reduces the quantity of capital goods. Depreciation is the reduction in
the value of capital goods due to usage and becoming obsolete.
• Depreciation is also known as capital consumption
• New capital goods are invested to replace the worn out goods.
• Gross investment is the total spending on capital goods.
• Net Investment= Gross Investment- Depreciation
Reward for capital is Interest
 Enterprise
• Enterprise is the willingness and ability to bear uncertain risks and to make decisions in a business.
• Entrepreneurs are the people who organize the other factors of production and bears the risk of
losing their money if the business fails.
 Mobility of Entrepreneurs
• Enterprise is the most mobile factor of production.

• The skills involved in being an entrepreneur can be applied to every industry, making them
occupationally mobile.

• Enterprise is also geographically mobile as a successful entrepreneur running a business in

India will also be successful in Singapore.

• Reward for Enterprise is profit

 Quantity of Entrepreneurs
• Quantity of Enterprise will increase if there are more entrepreneurs.

• A good education system , university degree courses will develop entrepreneurs in a

country.

• A tax reduction on a firm’s profits will encourage people to set up their own businesses.

Quality of Entrepreneurs
• Better education and training will increase the quality of entrepreneurs.

• Better healthcare will increase the quality of entrepreneurs.

• More experience and knowledge will enable the quality of entrepreneurs to increase.
 Section 1

Chapter 3

Opportunity Cost
Define Opportunity cost.

Opportunity cost is the cost of the next best alternative that is forgone in order
to take a decision.

Why does opportunity cost arise?

Opportunity cost arises because individuals, producers, governments have to

make competing choices due to finite or limited resources which have
alternative uses. Thus, there is a need to make a choice when allocating scarce
resources which ultimately leads to opportunity cost.

Who faces an opportunity cost?

All economic agents like consumers, workers, firms and the government face
an opportunity cost as they need to make choices.

Opportunity cost and Consumers

When consumers purchase a product, they are giving up the opportunity to

purchase another product due to limited incomes. The next best alternative
not chosen becomes the opportunity cost of the product chosen.

Opportunity Cost and Workers

The opportunity cost to a worker of working in a factory would be the leisure

time he would have sacrificed to work.
As workers have limited time they have to decide which job to choose. If they
undertake one job they cannot do another job while taking into account wage
and non-wage factors

Opportunity cost and Firms

As firms have limited resources they have to decide what to produce, e.g. if a
firm produces more of one model of car, it may have to produce less of
another model while taking into account profits that can be earned.

Opportunity cost and the Government

Governments have to decide how to spend tax revenue, e.g. if they spend
more tax revenue on education they cannot spend it on health care and thus
the opportunity cost of education is healthcare.

Examples of Opportunity Cost

Exam style Questions
 Section 1
Chapter 4
Production Possibility Curve Diagrams (PPC)
Definition

A Production Possibility Curve is a graphical representation of the maximum

combination of two goods and the combinations that can be produced by an
economy with the existing resources and technology in a given time period.

PPC Assumptions

 The economy can produce only two goods

 That the quantities of factors of production and the technology available
to the economy are fixed
 The given resources are fully and efficiently utilized

Movements along the PPC

 Change in combination of goods produced

 Scarcity
 Opportunity cost
 Reallocation of resources
Firm
PPC of an economy showing movement along the PPC

Production Points
 Outward shift of PPC
 Investment in capital i.e. plant and machinery and new technology.
 Inward migration of younger, skilled workers.
 Discovery of new natural resources.
 Improved education, training and healthcare to lift labour productivity.

Inward shift of PPC

 loss or exhaustion of some of its scarce resources. This reduces an
economy’s productive potential.
 Failure to invest in capital goods
 Depletion of natural resources
 Natural disasters