a) The problem of scarcity – where there are unlimited wants and finite resources
Difference between needs and wants
Less of what we need than what we want
“Needs refer to the minimum that is required for an individual in order to survive. They often tend to include food, water and shelter and are used to measure poverty”
“Wants refer to the desires by individuals of the consumption of goods and services. Economists believe that individual wants are unlimited”
The Basic Economic Problem
“We have unlimited wants for limited resources – scarcity exists”
b) The distinction between renewable and non-renewable resources
An economy converts inputs or factors of production into output (goods and services)
Factors of Production: Land
Includes land where natural resources are found (like oil and fertile soil), land where goods are produced and land that factories or shops are built on. Sea would also come under this category.
Factor of Production: Labour
Human input into production process – labour referred to as human capital (skills that individuals possess). Workforce of economy
Factors of Production: Capital
Refers to machinery, technology, transport and infrastructure used to produce goods and service – stock of (physical) capital increases through investment
Factor of production: Entrepreneurship
Refers to individual that organises and manages land, labour and capital in order to produce goods and services – they take risks in order to make profit
Resources are limited – only a fixed amount of land, people, machinery and managerial expertise at any point in time
If an economy increases their resource stock by developing their own factors or stealing someone else’s – resources available will always be outstripped by wants and needs of the population
Resources can be divided into renewable and non-renewable:
Renewable resources include wind and tidal power – the use of these resources doesn’t reduce amount available in future – use is regarded as sustainable
Non-renewable resources include fossil fuels and wood – fixed supply of these resources and once used up, no more available – use is regarded as unsustainable. But, some of these resources can be replenished if used in a sustainable way. This reduces production and consumption in the long run
c) The importance of opportunity costs to economic agents (consumers, producers and government)
Economic agents (governments, firms and individuals) are forced to make choices or decisions.
3 main decisions to make:
• What to produce?
• How to produce it?
• For whom to produce it for?
Decisions for these economic agents
Opportunity cost is important to economic agents (consumers, producers and governments)
Opportunity cost is the value of the next best alternative that is forgone
Cannot do both because of finite resources, so choice is made for where resources are best spent
If you were to study Economics at AS level, it means you cannot study French, Politics, Biology or whatever your other fourth choice would’ve been. If you were torn between Economics and Biology then the opportunity cost of opting for Economics is all the pleasure and knowledge you would’ve derived from opting for Biology