The Basic Economic Problem Full Notes

CHAPTER 1: THE BASIC ECONOMIC PROBLEM
Coverage of the chapter

1.1 The nature of economic problem
1.2 The factors of production
1.3 Opportunity cost
1.4 Production possibility curve diagrams (PPC)
UNIT 1: THE NATURE OF ECONOMIC PROBLEM

Learning objectives
By the end of this unit, you should be able to:

 Define finite resources and unlimited wants
 Give the difference between economic and free goods
The meaning of economic problem

Economic problem means that there are limited (finite)
resources/factors of production and unlimited (infinite) wants.
Limited (finite) resources/factors of production and unlimited

(infinite) wants form the nature of economic problem in
economics. Scarcity is the main/basic economic problem.
Finite resources means limited amount of resources available.

Examples of finite resources are oil, coal and uranium.
Infinite wants means unlimited (endless) wants. There is always

something else that people would like to posses and so people are
not satisfied.
KATOTO,S ALMIS ECONOMICS IGCSE PAGE 1

Written as per 2020 – 2022 IGCSE Economics syllabus
No unauthorised copying is allowed®
Note:
Scarcity is a major economic problem for all societies in the
world.
Economic problem applies to all areas of the economy including

consumers, producers, workers and government.
Therefore, the nature of economic problem of scarcity is that

there are unlimited wants and limited resources. This means
societies have to make choices.
Can economic problem be solved?

Economic problem is scarcity. This means there are finite
resources and infinite wants. It can never be solved because wants
exceeds resources available as wants grow faster than the growth
of resources (the growth of resources will not exceed the growth
of wants).
Economic goods and free goods

Economic goods are the goods that are produced and sold at
price. They are sold because they are scarce relative to demand.
Examples of economic goods are clothes, furniture, cars and
television. Economic goods have opportunity cost.
Free goods are the goods which are not scarce relative to
demand. Examples of free goods are air, pebbles on a beach and
sand in the desert. Free goods are unlimited in supply and they
have no opportunity cost.

UNIT 2: THE FACTORS OF PRODUCTION
Learning objectives

 Define the four factors of production and their rewards
 Explain the mobility of the factors of production
 Examine changes in quantity and quality of the factors of
production
Factors of production
Factors of production are scarce resources used in the production
of goods and services to satisfy consumer needs and wants.
Factors of production can be put into four categories which are
land, labour, capital and enterprise. These are explained
hereunder:-
Land
Land refers to natural resources available for production.
Examples of land are oil, coal, forests, fish and farming. The
payment made to the owner for the use of land as a part of
production process is called rent.
Labour
Labour refers to human effort available for production/human
capital. This effort can either be mental or physical. Examples of
labour are skilled and unskilled. The payment made for labour is
wages.

Capital
Capital refers to man-made physical goods used in production.
Examples of capital are machines, tools (computers, spanners,
hammers, etc), and factories. Capital includes all those items that
go into producing other things. The payment made for the use of
capital goods is called interest.
Note:
Capital should not be confused with money i.e., capital is not
money because money does not go direct into producing goods
and services. Money is financial capital because is used to
purchase capital goods.
Enterprise
Enterprise refers to the role of an entrepreneur in terms of
organising the other factors of production and in taking a risk in
doing so.
Enterprise can also be defined as a factor of production that

brings the other factors together to produce goods and services in
order to make profit.
Without enterprise there would be no production. Enterprise is

carried out by entrepreneur, and the reward gained by the
entrepreneur is profit.
What are the risks that an entrepreneur bears?

An entrepreneur has to bear the following risks

1. Demand decreasing due to falling incomes resulting into
decline in profit
2. Costs rising due to for example increase in wages and raw

materials costs
3. Risk of failure / losses / bankruptcy as a firm may go out of the

business.
4. A rival bringing out a better product due to e.g., better methods

of production.
Factors for the increase in entrepreneurs

Entrepreneurs in the economy can increase because of:
Rise in education
Rise in education will develop the skills needed to be an
entrepreneur.
Reduction in corporation tax / tax holidays

Reduction in corporation tax will increase financial return from
being an entrepreneur
Increase in subsidies for business/entrepreneurs

Subsidies may make it easier / cheaper to start-up a business
Reduction in the rate of interest

A lower rate of interest will make it cheaper to borrow to start up
a business

Reduction in barriers to entry / deregulation
Lower barriers to entry / deregulation would make it easier to set
up new firms
Differences between land and labour

The difference between land and labour described below:
Land is a natural resource example minerals and water bodies

whilst labour is human resources/workers for example skilled and
unskilled.
The payment for land is rent whilst the payment for labour is
wages.
Land is geographically immobile; it cannot be moved from one

area to another whilst labour is geographically mobile however,
there is some limited geographical mobility in the case of labour.
Differences between labour and enterprise

The difference between labour and enterprise is given below:
Labour is human/effort/workers’ services whilst enterprise is the

ability and willingness to bear uncertain risks/organise other
factors of production.
The reward for labour is wages whereas the reward for enterprise
is profit
Enterprise tends to be more geographically or occupationally

mobile than labour.
Differences between capital and land
The difference between capital and land is give below
Capital is human/man-made goods used to produce other

products whereas land is a natural resource.
Capital receives interest as a payment while land receives rent.
Mobility of factors of production

This refers to how easy or difficult it is for factors of production
to be transferred to alternative industries. Mobility of factors of
production is in two forms: occupational and geographical
mobility.
Mobility of land
Most land is occupationally mobile. This means it can be used for
a number of purposes eg., farming, building houses.
Land is geographically immobile. This means no part of land can

be moved from one area to another.
Mobility of labour
Labour is the most mobile factor of production. However some
workers may find it difficult to move from one job to another
(occupational immobility) and others find it difficult to move
from one area to another (geographical immobility).
Factors determining mobility of labour

The mobility of labour both geographical and occupational
depends upon the following factors.
1. Differences in educational systems
People may not be willing to move to a job in another
area/country if it disrupts their children’s education.
2. Family ties
People may be reluctant to leave the country they are currently
living in because they do not want to move away from relatives.
3. Lack of information
People without jobs, or those in poorly paid jobs, may stay where
they are because they are unaware of job opportunities elsewhere.
4. Restriction on the movement of workers

It is often necessary to obtain a work VISA to work in another
country. The VISA can be limited in supply. This limits mobility
of labour.
5. Lack of appropriate skills and qualifications

Highly skilled and educated tend to be more occupationally
mobile compared to unskilled and uneducated ones.
Mobility of capital
Some capital goods can be transferred from one area to another.
They are geographically mobile e.g., a photocopier. Other capital
goods are geographically and occupationally immobile e.g., coal
mine since they have been made for a specific purpose. Office
block may be used for a variety of purpose. It is occupationally
mobile.

Mobility of enterprise
Enterprise is also mobile both occupationally and geographically.
An entrepreneur can move from one business to another and
from one country to another country.
Quantity and quality of the factors of production

The quantity/amount of resources (factors of production) and
their quality/efficiency may change from time to time. This is
explained below.
Reasons for change in quantity of factors of production

1. Change in the size of labour force
Labour force may change because of change in population. For
instance, immigration will result in an increase in labour while or
emigration will cause a decrease in labour.
2. Change in the quantity of land

There can be more land due to an increase in natural resources
available to an economy e.g., discovery of oil. A decrease in
natural resources will decrease the quantity of land.
3. Change in the amount of capital

Capital goods may increase due to businesses purchasing more
machinery and equipment and may decrease if there is a decrease
in the purchase of capital goods.
Reasons for change in quality of factors of production

1. Improving the productivity of land
Land can be made more productive by using fertilizers to
increase the output.
2. Education and training
By increasing education and training, labour becomes skilled.
Also entrepreneurs can become skilled through education to
manage other factors of production. This increases output
produced.
3. Improvement in technology
Improved technology will increase the quality of capital. This will
also increase output produced.
Conservation versus using resources

A country should conserve its resources because of the reasons
(advantages) below
May avoid depleting resources enabling resources to benefit

future generations / reduce imports in the long-term and may
reduce pollution from overutilization of resources.
To achieve sustainable growth as conserving resources may mean

output; income and employment can be higher in the future.
Global demand of some resources may currently be lower. It may

be higher in the future.
The country’s skills of exploiting and utilising resources may grow

in the future.
Disadvantages of conserving resources

Conserving resources has the following disadvantages

Conserving resources may reduce income and employment now.
This will reduce living standards as a result, poverty may increase.
May reduce export and export revenue. This will worsen the
current account position/will move a country to a current account
deficit on the balance of payment.
UNIT 3: OPPORTUNITY COST
Learning objectives
 Define opportunity cost
 Explain the influence of opportunity cost on decision
making
Definition of opportunity cost

Opportunity cost (OC) is the next best alternative forgone when
choice is made/after making choice/decision. Opportunity cost
represents the benefit we could have enjoyed from the next best
alternative we choose to go without.
For example, deciding to use a piece of land to build new sports

complex, we may be going without the benefit of new houses or
farmland to grow food.
The influence of opportunity cost on decision making

Opportunity cost is very important in decision making by
consumers, producers and government.

Consumers
Consumers are the people who buy goods and services.
Consumers make choices in consumption. They make choice
because they have limited money (incomes). For instance by
buying a laptop, a consumer may not be able to buy a phone.
Producers
These are the people and companies making and selling goods
and services. Opportunity cost to producer is important because:
Producers decide how to use resources to produce one product

and sacrifice the other product. For example, by producing more
capital goods less consumer goods will be produced.
Producers have to use resources to produce products in high

demand in the most efficient way.
The government
The government has limited tax revenue and limited ability to
borrow.
If the government increases its spending on one area e.g.,

healthcare or education, it will have to reduces how much it can
spend on another area/areas e.g., infrastructure or unemployment
benefit.
Questions faced by the economies

Every economic system faces the following three questions
What to produce?
This means which product to produce and which produce to
sacrifice.
How to produce?
This means which technique of production is to be used. A
producer may decide to use either labour intensive technique or
capital intensive technique.
For whom to produce?

This means who will be potential consumers (market). It involves
identifying where will producers sell their products produced.
UNIT 4: PRODUCTION POSSIBILITY CURVE

DIAGRAMS (PPC)
Learning objectives
 Define PPC, draw the diagram and make interpretation
 Explain the meaning of points under, on and beyond PPC
 Explain what does it mean by movement along PPC
 Explain shift in PPC in terms of economic growth
Definition of PPC
A PPC is a curve that shows the maximum combination of two
products that a firm (or an entire economy) can produce with its
existing resources. Consider the figure below

Figure 1: Production possibility curve diagram (PPC)
In the diagram above, an economy can produce a maximum of
either 100 capital goods or 80 consumer goods if its resources are
efficiently used.
It shows that the firm has to give up 80 consumer goods to

produce 100 capital goods. However a firm will choose to
produce some capital goods and some consumer goods with its
resources.
Points under, on and beyond PPC

All points inside the curve/under the curve e.g., point E in the
above diagram, show inefficiency. This means that some of the
resources in the economy are unemployed or idle such as people
not working. The points indicate attainable combinations,
however the resources (factors of production) are not full utilised.
All points on the curve e.g., B and C show efficiency/full
employment of resources. This means there is maximum output
of goods and services produced from using the existing resources.
Points beyond PPC show scarcity/economic problem. This is

unattainable (unachievable) combination and it shows that the
economy cannot produce beyond PPC because resources
available are limited in supply.
Movement along PPC

Movement from one point to another point e.g., from B to C
represents opportunity cost. This means that an economy needs
to reduce production of capital goods by 30 units and increase
production of consumer goods by 15 units.
Thus, the opportunity cost of producing 15 units of consumer
goods is that of 30 capital good foregone.
Opportunity cost represents reallocating resources/moving

resources from factors of production from producing one
product e.g., cigarettes to the production of the other products
e.g., chocolate. Consider example below.

Figure: PPC showing opportunity cost
In the above diagram, the opportunity cost of producing more

other products / devoting more resources to other products (from
B1 to B2 means producing fewer cigarettes (from A1 to A2).
Shift in PPC in terms of economic growth

An outward shift in PPC represents economic growth. This
means the ability (productive capacity) of an economy has
increased. This is illustrated in the figure below.

Figure: PPC showing economic growth.
In the figure above, a shift in PPC from PPC 1 to PPC 2 means

an increase in the output of cars and furniture produced.
Economic growth enables more goods and services to become
available to consumers. It also increases employment
opportunities and living standards as a return poverty is reduced.
Causes of outward shift in PPC

The reasons for outward shift in PPC are explained below.
1. More training of employees/skilled labour

This enables workers to become more productive.
2. Improvement (advances) in technology

This involves greater investment in capital goods such as
machines and more efficient equipment.

3. Addition to resources
Increase in resources such as more available labour from net
immigration, increase in the number of graduates, and discovery
of natural resources such as oil will increase output.
Shift in PPC in terms of economic decline

An inward shift in PPC represents economic decline. This means
the ability (productive capacity) of an economy has decreased and
the economy can produce less output than before. This is
illustrated in the figure below.
In the figure above, a shift in PPC from PPC Y to PPC X means

a decline in the output of capital goods and consumer goods. It
shows that the productive capacity of an economy has decreased
and less output can be produced than before. There is economic
recession.
Economic decline increases unemployment, reduces living

standards as a return poverty increases.

Causes of inward shift in PPC include the following:
1. A fall in investment. A decrease in business investment in
capital goods as firms seek to cut back production will result
into recession.
2. The depletion (using up) of natural resources such as oil

reserves will cause a fall in output these resource industries.
Also a decrease in resources e.g., decreases in labour and
enterprise will reduce output produced.
3. Natural disasters such as earthquake, flooding (damaging

weather) will cause destruction resources and a fall in
output.
4. Poor technology. The use of outdated technology will reduce

productive potential of an economy resulting into a fall in
output.
PPC and change from full employment to unemployment.

A change from full employment to unemployment in the
economy is illustrated below.

From the diagram above, full employment at point A would mean
an economy making maximum use of resources making as much
output as possible (efficient use of resources). Unemployment at
point B means output is below potential and there is inefficient
use of resources/resources lying. Output will fall.
Effect of an increase in unemployment on an economy’s output

An increase in unemployment on an economy’s output can be
illustrated by using the following PPC diagram.
A
Unemployment means resources are unused/the economy is not

at full capacity. With unemployed resources, a country will be
producing further inside/moving inside its production possibility
curve. The output will be very low.

Effect of a decrease in unemployment on an economy’s output
A decrease in unemployment on an economy’s output can be
illustrated by using the following PPC diagram.
Unemployed resources mean an economy is producing inside the

PPC. A decrease in unemployment means more resources are
being used. Greater use of resources increases output.
Note:
A production point B can move on the frontier/curve because a
decrease in unemployment may mean full employment

Economic concepts shown by a production possibility curve
(PPC) diagram
The economic concepts shown by PPC diagram are:-
1. Scarcity/economic problem/unlimited wants and limited

resources/infinite wants and finite resources.
The curve shows that there is a limit to the amount that can be
produced with existing resources/maximum output of two
products.
2. Choice
The curve shows that more than one production point cannot be
selected.
3. Opportunity cost
The curve shows that if more of one type of product is produced,
less of another product can be made.
4. Efficiency/full employment
Any point on the curve is efficient/any point inside the curve is
inefficient.
5. Specialisation
The curve shows the maximum amount of a product that can be
produced if all resources are devoted to one good.
6. Economic growth
Economic growth is shown by a shift to the right of the curve.
Different shapes of PPC diagram
There are two main shapes of PPC. These are:
1. Outward bowed PPC

2. Straight line PPC
Outward bowed PPC diagram is illustrated below
The PPC diagram above is bowed outward because of increasing

opportunity cost. This means increasing production of one good
e.g., capital goods from 30 to 60, will involve reduction in the
production of consumer goods from 75 to 60.
Straight line PPC

The straight line PPC diagram slopes downward as shown
hereunder:

The above straight line PPC diagram slopes downward because of
constant opportunity cost. This is because increase in production
by certain amount, will involve reduction in the production by
same amount.
For instance, increase in the production of consumer goods by 10

units will involve a reduction in capital goods by 10 units.
Partial shift in PPC

Any change in factors for a shift in PPC for one product, will
cause a partial shift in PPC. For example, if an economy is
producing manufactured goods and agricultural goods; any
improvement in agricultural goods e.g., improvement in fertilisers
will partially shift the PPC. This may be illustrated below.

Improvement in fertilisers will result into an increase in
productivity of land. Production in agricultural goods will increase
shifting PPC from XX to XY.

REVISION QUESTIONS – STRUCTURED QUESTIONS
CHAPTER 1: THE BASIC ECONOMIC PROBLEM
1. Explain the economic problem of scarcity. [3]

2. Define the concept of opportunity cost. [3]
3. Distinguish, using examples, between the different factors of
production. [6]
4. Discuss whether a country should conserve or use its natural
resources. [8]
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5. Define finite resources and infinite wants [4]
6. Explain the difference between an economic good and free
good. [4]
7. Explain what affects the mobility of factors of production. [4]
8. Explain how the quality of the factors of production might be
improved. [4]
9. Explain, using examples, what is meant by the factor of
production called land. [3]
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10. Describe the nature of the economic problem. [4]
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11. Production involves the use of the four factors of
production. The use of these resources involves an opportunity
cost.
(a)Using appropriate examples, describe the four factors of
production. [6]
(b) Using a production possibility curve, explain what is
meant by opportunity cost. [6]
(c) Discuss whether more factors of production should be used
to build houses. [8]
0455/22/M/J/13
12. Using examples, define the factors of production, land and
capital. [4]
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13. In 2012, the Indian Prime Minister announced that the
Government was going to spend US$90 million on sending a
spaceship to the planet Mars. Some economists argued that it
would be better to use the factors of production, such as land
and labour, to improve education or to build more roads.
(a)Describe two ways in which land is different from labour. [4]
(b) Explain the significance of opportunity cost for a
government when making its spending decisions. [4]
(c) Using a production possibility curve diagram, analyse the
impact of an increase in resources on an economy. [5]
(d) Discuss whether the building of more roads will benefit
an economy. [7]
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14. A number of economies are devoting more of their
resources to the provision of health care. Due to the economic
problem, this involves them having to make difficult choices.
(a)What is meant by the ‘economic problem’? [2]
(b) Using a production possibility curve diagram, explain
why choices have to be made as to how to allocate resources.
[6]
0455/22/M/J/14
15. In 2012, a few countries experienced a decrease in their
factors of production, including labour and enterprise. New
Zealand, however, experienced an increase in both the quantity
and quality of its factors of production. In the same year, the
country exported more agricultural and manufactured goods.
(a)What is the difference between labour and enterprise? [4]
(b) Explain why farmers should consider opportunity cost
when deciding how to use their factors of production. [4]
effect of a decrease in the supply of labour and enterprise on
an economy. [5]
(d) Discuss whether an increase in the quality of a country’s
factors of production will always increase its exports. [7]
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16. In 2013, an earthquake on the Iran/Pakistan border
destroyed many factories and homes. Some officials wanted the
Governments to rebuild the factories and homes, even though
there would be an opportunity cost. Others suggested that
some people should be encouraged to emigrate.
(a) Define ‘opportunity cost’. [2]
(b) Explain why the economic problem can never be solved.
[4]
effect of the destruction of some of its resources on an
economy. [6]
(d) Discuss whether a country will benefit from the emigration
of some of its people. [8]
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17. Students have to consider the opportunity cost of going to
university. University graduates usually earn more than people
who have not gone to university. Having more graduates
influences a country’s production possibility curve. Some
economists suggest that students should pay the full cost of
their university courses and accommodation. Others say that
the government should pay some or all of the cost.
(a)Describe a possible opportunity cost of a student going to
university. [2]
(b) Explain why university graduates usually earn more
than people who have not gone to university. [4]
(c) Using a production possibility curve diagram, analyse what
effect an increase in the number of graduates will have on an
economy. [6]
(d) Discuss whether graduates should pay the full cost of
their university education. [8]
0455/22/M/J/15
18. In 2009, the unemployment rate in Spain was 8% and the
annual inflation rate was 3%. By April 2013, the
unemployment rate had reached a record 27% but the annual
inflation rate had fallen to 2%. The resulting rise in government
spending on unemployment benefits involved an opportunity
cost.
(a) Explain why government spending on unemployment
benefits involves an opportunity cost. [4]
(b) Using a production possibility curve diagram, analyse
the effect of an increase in unemployment on a country’s
output. [6]
0455/23/M/J/15
19. What is meant by a production possibility curve? [2]
20. Explain, giving examples, two factors of production used in
the tourism industry. [4]
21. Why may less wheat be the opportunity cost of producing
more milk? [2]
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22. Why can the economic problem never be solved? [2]
23. What is meant by ‘scarce resources’? [2]
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24. Identify two risks that entrepreneurs have to bear. [2]
25. Explain two different opportunity costs that may be involved
in a person becoming a sole proprietor. [4]
26. Analyse, using a production possibility curve, the effect of
advances in technology. [6]
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27. Read the 0455/22/O/N/16 extract, question 1 and answer
the following question
Using information from the extract, explain how the Mints
illustrate the economic problem. [2]
28. Using a production possibility curve diagram, analyse the
effect of a decrease in unemployment on an economy’s output.
[6] 0455/22/O/N/16
29. Analyse how a country’s production possibility curve
diagram can shift outwards. [6]
30. Analyse how an increase in investment can result in
economic growth. Illustrate your answer with a production
possibility curve diagram. [6]
31. Analyse, using a production possibility curve diagram, how
an economy suffering from unemployment will be affected by
an increase in labour productivity. [6]
32. Read the extract from 0455/23/O/N/16 extract, question1
and answer the following questions
(a) Describe the opportunity cost of Mauritania exporting fish.
[2]
(b) Discuss whether an economy should or should not conserve
its fish stocks. [6]
33. Read the 0455/22/F/M/16 extract, question 1 and answer the
following question
Using information from the extract, identify two examples of
the factor of production ‘land’. [2]
34. What is the opportunity cost to a person of going to
university? [2]
0455/22/F/M/16
35. Read the 0455/21/M/J/17 extract, question 1 and answer the
following question
Explain opportunity cost and give an example from the extract.
[4]
36. Discuss whether a country would benefit from devoting
more resources to producing capital goods. [8]
37. Explain two benefits that an economy may gain as a result of
the discovery of oil on its land. [4]
38. Analyse, using a production possibility curve diagram, what
effect net immigration is likely to have on an economy. [6]
0455/21/M/J/17
following question
Discuss whether Botswana should mine all its diamonds and
sell them as quickly as possible. [5]
40. Identify the two human factors of production. [2]
41. Explain two economic concepts shown by a production
possibility curve diagram. [4]
42. Explain the connection between opportunity cost and the
purchase of shares. [4]
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43. Explain why the concept of opportunity cost is important in
deciding how to allocate resources. [4]
0455/23/M/J/17

the following questions
(a) Identify, from the extract, two factors of production
used in producing cigarettes. [2]
(b) Analyse, using a production possibility curve diagram,
the effect of moving factors of production from producing
cigarettes to producing other products. [5]
45. Explain two reasons for conserving resources. [4]
0455/21/O/N/17
46. What is a possible opportunity cost of working? [2]
47. Analyse, using a production possibility curve diagram, how
an increase in labour productivity will affect an economy. [6]
48. Name two factors of production used in making cars. [2]
0455/22/O/N/17
49. What is the difference between capital and land? [2]
50. Explain two reasons why a firm may decide to use more
labour and less capital in producing its products. [4]
51. Analyse the possible opportunity costs of an increase in
government spending on higher education services. [6]
52. Analyse, using a production possibility diagram, the effect on
an economy’s output when there is a change from full
employment to unemployment. [6]
0455/22/F/M/17
53. What may be the opportunity cost of building an airport? [2]
54. Identify two examples of capital goods that may be used by a
farm. [2]
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55. Analyse, using a production possibility curve (PPC) diagram,
the effect of reallocating resources from kerosene to LPG. [6]
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Explain, using information from the extract, how the concept
of opportunity cost affects all rubber farmers in Liberia. [4]
the effects of high unemployment in a country. [6]
58. Identify two factors of production involved in mining gold.
[2]
59. Discuss whether or not an economy should mine and sell all
of its gold now. [8]
0455/22/O/N/18
60. Identify two ways a government could conserve its country’s
resources. [2]
61. Identify the reward received by labour and the reward
received by enterprise. [2]
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following question
Explain, using information from the extract, an opportunity
cost of working. [2]
63. Define a capital good. [2]
the effect of damaging weather on an economy. [6]
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65. Explain the difference between productivity and production.
[4]
0455/21/O/N/18

Explain, using information from the extract, how the concept
of opportunity cost affects all rubber farmers in Liberia. [4]
67. Using information from the extract, explain whether the US
was operating on or inside its production possibility curve in
2014. [2]
0455/21/O/N/16
68. Discuss whether an increase in the quality of a country’s
factors of production will always increase its exports. [7]
0455/23/M/J/14


The Basic Economic Problem Full Notes

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The Basic Economic Problem Full Notes

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CHAPTER 1: THE BASIC ECONOMIC PROBLEM

Coverage of the chapter

UNIT 1: THE NATURE OF ECONOMIC PROBLEM

By the end of this unit, you should be able to:

The meaning of economic problem

Limited (finite) resources/factors of production and unlimited

Finite resources means limited amount of resources available.

Infinite wants means unlimited (endless) wants. There is always

KATOTO,S ALMIS ECONOMICS IGCSE PAGE 1

Economic problem applies to all areas of the economy including

Therefore, the nature of economic problem of scarcity is that

Can economic problem be solved?

Economic goods and free goods

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By the end of this unit, you should be able to:

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Enterprise can also be defined as a factor of production that

Without enterprise there would be no production. Enterprise is

What are the risks that an entrepreneur bears?

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2. Costs rising due to for example increase in wages and raw

3. Risk of failure / losses / bankruptcy as a firm may go out of the

4. A rival bringing out a better product due to e.g., better methods

Factors for the increase in entrepreneurs

Reduction in corporation tax / tax holidays

Increase in subsidies for business/entrepreneurs

Reduction in the rate of interest

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Differences between land and labour

Land is a natural resource example minerals and water bodies

Land is geographically immobile; it cannot be moved from one

Differences between labour and enterprise

Labour is human/effort/workers’ services whilst enterprise is the

Enterprise tends to be more geographically or occupationally

Capital is human/man-made goods used to produce other

Capital receives interest as a payment while land receives rent.

Mobility of factors of production

Land is geographically immobile. This means no part of land can

Factors determining mobility of labour

4. Restriction on the movement of workers

5. Lack of appropriate skills and qualifications

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Quantity and quality of the factors of production

Reasons for change in quantity of factors of production

2. Change in the quantity of land

3. Change in the amount of capital

Reasons for change in quality of factors of production

Conservation versus using resources

May avoid depleting resources enabling resources to benefit

To achieve sustainable growth as conserving resources may mean

Global demand of some resources may currently be lower. It may

The country’s skills of exploiting and utilising resources may grow

Disadvantages of conserving resources

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UNIT 3: OPPORTUNITY COST

Definition of opportunity cost

For example, deciding to use a piece of land to build new sports

The influence of opportunity cost on decision making

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Producers decide how to use resources to produce one product

Producers have to use resources to produce products in high

If the government increases its spending on one area e.g.,

Questions faced by the economies

For whom to produce?