MARKETS IN ACTION

CHAPTER 2 The Economic Problem

The Economic Problem (Scarcity & Choice) (https://www.youtube.com/watch?
v=W9IjktFC9Tg&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=1)

Basic Economic Problem will be how to allocate Scarce Resources Given Unlimited Wants

Planet is running out

of resources to satisfy
human wants

Wants Needs
Desire for goods & service (G&S) such as long Limited. Bare minimum to survive in the world
holidays, bigger house, antique car such as food, water, shelter and clothing

Economic Goods Free Goods

Scares resources Not scares resources
{when population rises, production increases, {air, water in some countries}
free goods will change to be economic goods –
e.g. toll payment for roads}
Scares Resources [Known as factors of production] CELL [resources combined to produce G&S]
Capital [money is not capital, as it is not Enterprise/ Entrepreneurship [organise
productive resource] production and take risk]
 Working/ Circulating Capital (WC) -  Risk takers innovate and produce G&S
Resources in the production system used using C,L,L to make profit
to do final products (raw materials)  Not only owners but managers can be
 Fixed Capital (FC) - resources used to entrepreneurship if they take RISK and
transform WC to final products ORGANISE production
 FC aka man made aids to production e.g.
tools, machine, factories, school and
roads
 FC cannot be transformed to a final
product as it is already a final product
Land Labour
 All natural resources below, on, in &  Human resources, work done to produce
around earth (incl. atmosphere) G&S
 Non Renewable Resources  Value of worker is called Human Capital
- Once used will not be replaced {e.g.  Value is increased with education &
coal, oil, gold & copper} training
- Resources that are diminishing
overtime due to exploitation of
economy {e.g. cutting trees to make a
road
 Renewable Resources
- Can use & replace {e.g. fish, water,
forest [if replanted only]

Difficulty Faced in Allocation of Finite Resources to Infinite Wants?

What to produce?
made on [to help allocation

 Business (Biz) decides based on market demand

Forces CHOICES to be

of scares resources]

 Economy can decide the mix of goods to produce

How to produce?
 Biz decides based on what is most cost effective to minimise the use of scarce
resources. E.g. if to manufacture phone in UK or Thailand?; If to use steel or
fibreglass
For whom to produce?
 Based on income level (affordability). E.g. If for workers or pensioners
 Normally some G&S, government (govn) will subsidies to make it affordable

How to know if the Choices made were the GOOD one?

Involves range of Can be graded in terms of benefits gained from

alternatives each alternatives
Opportunity cost (OC)
There is always OC when choices are made. OC – the cost of next best alternative forgone when a
choice is made. Consumers face OC in every decision making. Rational consumers will always try to
make the decisions which have the lowest opportunity cost. E.g. OC of a chocolate bar is 1 packet of
crisps; OC of buying machine may be wages of 4 labours.

FREE GOODS NO OC => nothing to sacrifice

Rewards for Factors of Production

Payment made to the owners of factors of production for allowing economic agents [individuals,
firms, govn & international agencies] to use them for a period of time. E.g. Lease payment, rental,
royalty, salary, share of profit.