The basic economic problem is the problem that in the real world there are scare resources, that is limited quantities of resources and unlimited wants of these resources. Economists have to be able to make distinction between a want or a need in order to see whether they are limited or unlimited. Needs is something humans need for survival e.g. food. Wants are something, which are not needed for survival e.g. an iPod.
Resources have to be allocated which means choices have to made. The basic economic problems means that societies need to decide:
– What to produce
– How to produce it, and
– For whom to produce it
Every time we make a choice we fail to choose another option and the benefit lost from the next best opportunity is called opportunity cost. For example, right now you have chosen to watch this video your opportunity cost might be talking to your friend on the phone.
There are four factors of production that bring some form of output to the world. These are:
1. Land- includes premises and all natural resources e.g. timber, farming
2. Labour – workers and human resources
3. Capital – all manufactured resources e.g. machines, vehicle, building tools
4. Entrepreneurship – Involves risk taking, setting up a new business etc.
Out of production we get to two types of goods: economic goods and free goods. Economic goods are goods that are made from resources, which are scarce like oil. So free goods are goods made from resources, which are not scare like air.
Sustainable resources are those, which can be exploited over and over again because they can renew themselves e.g. sunflowers. In contrast, resources such as coal and oil cannot be replaced therefore are not sustainable.