1. The Basic Economic Problem
Choices and the allocation of resources
Section 1

2. Learning Objectives?
The problem of unlimited wants and finite resources.
The distinction between renewable and non-renewable resources.
The use of production possibility frontiers to depict opportunity cost,
Economic growth and the efficient allocation of resources.
The use of marginal analysis in depicting opportunity cost.
The distinction between movements along and shifts in production possibility frontiers, and their possible causes

3. The basic economic problem
Resources are scarce and we have limitless wants
There are some who think that oil will run out in 40 years
Oil is a scarce resource
Oil isn’t the only scarce resource – other commodities like aluminium, copper, lead, tin, zinc and timber might also get used up if we continue to consume them at the same rate as we are doing today
How do we manage to make these last?
This is the central problem that we study in economics
The economic problem: there are limited resources and unlimited wants
Watch first few minutes of this video

4. These are also called factors of production
When we talk about resources we are talking about land, labour, capital and enterprise
These are also called factors of production
Land – the land itself, sea, forests, soil, minerals such as coal and oil – anything that is a natural resource
Labour – the people that work to make goods and services
Capital – the man made resources that help to produce goods and services such as factories, equipment, computers etc
Enterprise – people that manage and control the firms that make the goods and services
Factors of Production – Land, labour, capital and enterprise

5. Renewable vs Non-Renewable
Non-renewable resources such as coal, oil, gold and copper are all land resources that once used will never be replaced
Renewable resources are also land resources but they can be replaced e.g. fish stocks, forests or water

6. Production Key Definition!
Using inputs (resources) to make outputs (goods and services) to satisfy the needs and wants of consumers

7. The satisfaction of human wants
There is a difference between needs and wants
Needs are those things that people need to have to survive e.g. water
Wants are things that people can do without but make life more enjoyable
Needs– any resource that is not scarce e.g. air
Complete Activity 1.2 P7

8. Consumption Key Definition! When we eat we are consuming food
When we watch television we are consuming electricity
The people who buy goods and services to satisfy their wants are known as consumers and their spending is called consumption expenditure
Some people can produce a number of their own goods and services (e.g. grow veg in the garden)
For the rest they must engage in trade or exchange
To do this they go to work to earn money
They exchange the money for the goods and services
Consumption - Using up goods and services (products) to satisfy consumers’ needs and wants

9. Economists group different products into four categories
Goods and Services
Economists group different products into four categories
Consumer goods and services – any good that satisfies consumer wants
Consumer durables – last a long time like a car
Non durables – must be used quickly like food and drink
Capital goods
Man made resources that help produce other goods and services
Public goods and merit goods
Public goods are provided by government because everyone benefits from them and no private company would produce them e.g. defence, street lighting etc
Merit goods – government provides because private companies don’t provide enough – e.g. healthcare or education

10. The basic economic problem
Back to………
The basic economic problem
Human wants are unlimited but resources are scarce

11. So, we all have to make choices
There is a limited amount of resources such as raw materials, machines, factories and skilled workers. But there are a number of different ways in which they can be used.
CHOICE
CHOICE
Resource allocation therefore involves deciding how best to use scarce resources to satisfy as many needs and wants as possible

12. Opportunity Choice Key Definition!
If you have a limited amount of money you have to make a choice as to what you spend it on
Government has to do the same
The cost of something is what we have to give up to get it (the next best alternative)
Opportunity cost – the cost of the next best alternative foregone
Complete activity 1.6 P12
$100bn
$100
Food? Entertainment?
Clothing?
Defence? Health care?
Roads?

13. Production possibility curves
Opportunity cost – the cost of the next best alternative foregone
Because resources are scarce and have alternative uses, a decision to devote more resources to producing one product means fewer resources are available to produce other goods
We can use a PPC to illustrate this
This firm can make 100 cars per week or
120 trucks per week
Combinations are plotted on the PPC

14. Production possibility curves
Opportunity cost – the cost of the next best alternative foregone
What is the opportunity cost of making 120 trucks?
For the firm to make 120 trucks it has to give up 100 cars
What is the opportunity cost of making 100 cars?
It has to give up 120 trucks so that is the opportunity cost
If this firm is producing at point A and it wants to produce 18 more trucks what is the opportunity cost?
10 cars
If the firm is at point B and wants to produce 10 more cars what is the opportunity cost?
18 trucks

15. Production possibility curves
A PPC of an economy shows the maximum amount of goods an economy can make using all of its factors of production
What is the opportunity cost of producing 15 more tonnes of consumer goods?
What is the alternative?
The capital goods
To make more consumer goods you have to give up capital goods
To go from 50 to 65 consumer goods you have to go from 60 to 50 capital goods
You are giving up 10
The opportunity cost of making 15 more tonnes of consumer goods is 10 tonnes of capital goods
Opportunity cost – the cost of the next best alternative foregone
An economy producing consumer goods and capital goods

16. Production possibility curves
Production possibility curves (PPCs) show the maximum combined output of two or more products a firm or an entire economy can produce with its available resources
Resources are being used efficiently if they are producing their maximum output
But, because resources are limited, producing more of one product means producing less of another
PPCs are therefore a useful way of showing the opportunity cost of producing more of one product in terms of how much of another must be given up

17. The concept of the margin
Margin = a point of possible change
At the point C the economy could produce more manufactured goods but it would need to give up non-manufactured goods
The marginal cost of producing 5 more units of manufactured goods would be 10 fewer units of non-manufactured goods (shown by the movement from C to D)

18. Economic growth
At point F resources are not being efficiently as possibly
A movement from point F to a point on the PPB would not represent economic growth – just a better use of resources
Economic growth can only be represented using a shift of the PPB like in the diagram on the right
Growth can happen for two reasons
An increase in the quality of factors of production
An increase in the quantity of factors of production