Notesale: Turn your study into money

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ECONONIMC NOTES: BASIC ECONOMIC PROBEM

Topic 1: Basic Economic Problem
Economics is not all about money
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Economics is more than just a study of money and it studies:
The production of commodities: How much an economy produces, both in
total and of individual items, how much each firm produces or person produces,
what techniques are used to produce and how many people are employed
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It studies how people make choices to allocate resources in order to satisfy their needs
and wants
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Problem of Scarcity: The excess of human wants over what can actually be
produced or fulfil these wants
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Means of fulfilling wants is limited because the world has a limited amount of
resources
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How to produce?

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1
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This labour force is limited in numbers and come
in different skills
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(ex
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(ex
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(ex
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Land (Natural resources): Refers to the land area, upon which firms
operate as well as the raw materials extracted from that land
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Oil)

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3
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Refers to factories, machines, cranes and other equipment
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4
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The entrepreneur brings together the other
factors of production, organises and manages them and bears the risk
of the enterprise not being successful
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What to produce?

Consumer goods – Goods which are consumed in order to satisfy peoples’ immediate
wants
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Goods – tangible

Goods & Services = Commodities

Services - intangible
Choice involves sacrifice
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Opportunity Cost: It is the next best that could have been an alternative
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With this we are recognising that we face trade-offs
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We therefore have to make decisions between alternatives
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In
Economics this is known as ‘rational decision making’ or ‘rational choices’
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For a firm this may mean by choosing whatever will maximise their
profits
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Marginal costs: The additional costs of doing a little bit more of an activity
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Change in Y/
Change in X

Economic efficiency: A situation where each good is produced at the minimum
cost and where individual people and firms get the maximum benefit from their
resources
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Allocative efficiency: A situation where the current combination of goods
produced and sold gives the maximum satisfaction for each consumer at their current
levels of income
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a
b

c

Production Possibility Curve (PPC): A curve showing all the possible
combinations of two goods that a country can produce within a specified time period
with all its resources fully and efficiently employed
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Point A: All resources are used in the production of food
Point B: - Within productive capacity of the economy
- Production of food and clothing can increase without opportunity cost
- Some factors of production are not being used
- Productive inefficiency
- Unemployment
Point C: All resources are used in the production of clothing

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ECONONIMC NOTES: BASIC ECONOMIC PROBEM

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Point X: Productive efficiency where the given amount of resources available
are being used and is impossible to produce more of a commodity without
opportunity cost
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Point W: Outside productive capacity of the economy
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The more we produce of either commodity, opportunity
cost will gradually increase because of the Law of Diminishing Returns
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2
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4
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oil)
Land reclamation (man-made land)
Investment in new plant and machinery

Investment: With this investment in capital, new resources may be found,
technological advances
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Increase in quality of factors of production:
 Technological advances (Capital investment)
 Education and training leading to more skilled labour force
 Increase in factory mobility*

*Mobility
Geographical mobility – The ease that people can move from
one region to another
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Occupational mobility – The ease at which people can switch
jobs
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2
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4
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6
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For whom to produce?
We allocate resources to the production of goods that will satisfy needs and wants
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Allocative efficiency
All resources are being allocated in a way that wil

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