1.Basic Economic Problem

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    1. Basic Economic Problem

    Economics – The study of how scarce resources can be allocated to satisfy people’s unlimited wants.

    Scarcity – When there are not enough resources to satisfy our wants and needs.

    Resources – The inputs that are used in the production process to produce goods and services. These are also called Factors of Production. Resources are limited.

    • Capital – Human-made goods that are used in the production of other goods. Payment comes in Interest
    • Entrepreneurs (Enterprise) – The person who takes the risk and has the skills to combine the other factors of production to produce goods and services. Payment comes in Profit
    • Labour – Human work or effort and the people who offer their services to businesses in exchange for wages. Payment comes in Wages
    • Land – Any resource that exists as part of a natural process. Can be renewable or non-renewable. Payment comes in Rent

    Geographical mobility – the resource is capable of changing location

    Occupational mobility – the resource is capable of changing use

    Opportunity Cost – The next best alternative foregone e.g. Mary could buy lettuce or chips with her $5 and she chose chips. Lettuce would be Mary’s opportunity cost.

    Production possibility curve – a curve showing the maximum output of 2 products and combinations of these products that can be produced given existing resources and technology.

    Consumer – people or firms who need or want goods and services

    Producers – use resources to make goods and services to satisfy consumers’ needs and wants

    Wants – what we desire but do not necessarily need to survive e.g. games, bags

    Needs – what we must have in order to survive e.g. food, clothing, shelter

    Renewable resources – resources that will regenerate naturally within a reasonable time frame e.g. Fruit, Trees, Vegetables

    Non-renewable resources – resources that will not regenerate naturally within a reasonable time frame e.g. Coal, Oil, Ores

    Free good – goods that are available without limits e.g. air, sunlight

    Economic good – goods that are scarce in comparison to people’s wants and need and therefore must be paid for e.g. television, paper, electricity

    Public (collective) good – goods that are non-excludable and non-rival

    Non-excludable – once paid for, it is impossible to stop people from using the good or service. This creates the ‘free rider’ problem

    Non-rival – consumers do not have to rival each other for use of the good; it will not run out

    Merit good – a commodity or service that is regarded by society or government as deserving public finance e.g. education

    Demerit good – a commodity or service that is regarded by society or government as not deserving public finance e.g. cigarettes, alcohol

    Consumer good – goods that are used and paid by individuals or groups in the household sector Normal goods – goods we demand more of as our income increases e.g premium steak

    Inferior goods – goods we demand less of as our income increases e.g second hand goods, ‘budget’ brand goods

    Durable goods – goods that can be used more than once

    Non-durable goods – goods that are perishable and do not last very long Positive good – beneficial to society e.g. clean water, medicine

    Negative good – a cost to society e.g. pollution, waste products

    Disposable Income – the money remaining after taxes are paid. If taxes increase, disposable income decreases

    Semi-finished goods – goods that are used to produce other goods e.g. leather, wool