Section 1: The basic economic problem

❖ The Basic Economic Problem:

Scarcity is the basic economic problem where the wants are unlimited but the
resources are limited. The more we get richer, the more wants are there but the
resources are the same in number.

What are free goods?

Free goods are goods that don’t require resources to produce them and are
given free by nature thus there is no opportunity cost to it (the best alternative
can be taken too). Example: Peaches and Mangoes are given free by nature but
we can produce from both of them.

What are economic goods?

Economic goods are goods that require resources to produce them and are
always man-made (not given free by nature) thus they have an opportunity cost
to them. Example: A firm can produce either cars or trucks with steel but they
cannot produce both so if they produce cars, the truck is the opportunity cost.

❖ Factors of production:
Factors of production are the resources used to produce goods and services.
There are 4 factors of production which are land, labour, capital, and enterprise.

Land: Land includes all the resources given by nature from which we can further
produce. Example: coal, plains, and mangoes, these are all given by nature and
we can further produce from them.
The land is the most immobile factor of production as it cannot be moved from an
area to another but only in its traditional form as it can partially be moved like
changing the direction of the river to an industrial area. The land is occupationally
mobile as it can be used for a range of purposes.
The quantity of land doesn’t increase but the amount can be increased by
reclamation and the amount can be decreased by factors like soil erosion.
The quality of land can be increased by fertilizers which make the land fertile and
more capable of producing
Capital:
Capital is any man-made good from which we can further produce like
machinery, it is man-made but we can further produce from it. Capital goods and
consumer goods are the same things but the purpose differs. A car can be
bought for traveling and own satisfaction which is a consumer good whereas a
car used for taxi service is a capital good as we are further producing from it.
Capital and consumer goods are both economic goods as they have an
opportunity cost.

The mobility of the capital depends on its type and size as a factory can’t be
moved from one country to another but a laptop can be. The occupational
mobility of capital also depends on the type as cars cant be used for banking.
The quantity of capital can be increased by investment which means spending on
capital and net investment means total expenditure in capital whereas
depreciation means the value of worn-out capital.
The quality of capital increases when technology improves which makes more
efficient production giving firms more profit.

Labour:
Labour includes the physical and mental human effort used in producing. Mental
labor is the use of skills to produce a good or service, for example, an engineer
has skills and has applied them for producing a car whereas physical labor
doesn’t require any qualification, skills, and specialization. Generally, mental
labor is paid more as they have specialization and skills, and physical labor is
paid less as it can be done by any common person.
Labour has factors affecting mobility where are :
● Family ties
● The difference in housing prices and availability
● The difference in the education system
● Travel restrictions: VISA
● Lack of information

The occupational mobility of labor generally immobile as it requires particular

skills and qualifications

The quantity of labor is affected by:

● Age proportion
 ● Retirement age
● School leaving age
● Total population
● Attitude to working women

The quality of labor can be increased by providing better education and training
which will in the productivity of laborers or labor productivity which means more
output per labor.

Enterprise:
Enterprise is the set of entrepreneurs who are ready to bear uncertain risks in a
business. They start a business and allocate the resources to the right place to
produce goods and services. They receive profit or loss by doing this.
Enterprise is the most mobile factor as they can be moved from one area to
another and they can bear uncertain risks and receive either profit or loss, they
can be moved from one field from another as they know how to allocate the
resources which they can do in any field whether it is a juice company or a truck
company they will bear the risks. These people are called entrepreneurs.

The number of entrepreneurs can be determined by the universities that provide

business studies and also the tax percentage on profits. If fewer universities and
more taxes will be there then people will be discouraged to become
entrepreneurs.
The quality of enterprise can be improved by more advanced courses by the
universities. Better training will increase the quality of the enterprise.

Rewards:
● Land - rent
● Capital - interest
● Labour - wages
● Enterprise - profit

Opportunity cost:

Opportunity cost is the cost of the decision in terms of the best alternative
forgone. In simple terms, it is the best alternative forgone.
Eg: A firm producing cars and trucks wants to produce trucks at its max capacity
then it has to lose its cars. So if the max capacity of cars is 100 and trucks is 200
and cars is 100 then it loses 100 cars which is the opportunity cost of producing
200 trucks and vice versa

Firms face opportunity cost when they have to choose between two products say
juice and yogurt and yogurt gives them more profit thus they will go for it and
juice will the opportunity cost for producing yogurt.

Consumers face opportunity cost when they have to choose between products
say a laptop or a new A.C, they will go for the product they need the most and
say if they get a laptop then A.C will be the opportunity cost and vice versa

Production possibility curve:

The production possibility curve or production possibility frontier shows the

maximum output of two products.

A production point shows what is being produced and what may be produced in
future
Any point inside the curve shows that the resources are not being used to the
fullest
Any point on the curve shows that resources are being used to the fullest
A movement in the PPC shows that resources are being reallocated
For example: if a firm decides to produce 60 cars and 40 trucks and if it wants to
produce 100 cars then it has reallocated the resources for producing cars which
will result in less production of trucks
Which is the opportunity cost of producing 100 cars
Question:

Answers:
1) 50 units
2) 5 units of capital goods (35-30=5)
A PPC will shift towards the right if there is an increase in quality or
quantity in FOP, it increases the firm's productive potential(it will be
capable of producing more), it is also known as potential economic growth.
A PPC will shift towards the left if there is a decrease in quality or quality of
FOP
25/09/2022