The Economic Problem

Content Nature and Purpose of Economic Activity Economic resources Economic objectives of: –Individuals –Firms –Governments Scarcity, choice and allocation of resources Opportunity cost Value judgements

Nature and Purpose Of Economic Activity The central purpose of economic activity is the production of goods and services to satisfy needs and wants Goods are tangible products e.g. a car, a loaf of bread Services are intangible e.g. a haircut, an aeroplane flight Needs are basic requirements people need to survive e.g. food, shelter Wants are things that people desire e.g. a sports car

Economic Resources Key resources that businesses use are: –Land –Labour –Capital –Enterprise Land refers to all naturally occurring resources used to produce goods and services Labour is the measure of work done by humans to produce goods and services Capital is the money or wealth used to create goods and services Enterprise refers to the entrepreneurial skills and abilities that allow risks to be taken and profits to be earned

Economic Objectives Economic objectives are the targets that are set by individuals / firms / governments to achieve All bodies pursue maximising objectives which aim to get the most out of what they do Firms are regarded as profit maximisers who attempt to maximise shareholder value and generate funds to support growth –Individuals –Firms –Governments

Economic objectives of individuals Different individuals will have differing objectives Employees will seek high wages Shareholders desire maximum profits and dividends Employers want maximum profits and minimum costs

Economic Objectives Of Firms Firms are regarded as profit maximisers who attempt to maximise shareholder value and generate funds to support growth Other key objectives include: –Growth by increasing sales / market share –Survival

Economic Objectives of Governments The governments major objectives are: –Full employment or low unemployment –Price stability –High and sustainable economic growth –Balance of payments in equilibrium

Economic Resources – Scarcity and Choice Resources are limited this is the concept of scarcity Businesses need to choose which resources to use and how to utilise them – this is the concept of choice

Scarcity and Choice Fundamental to this problem are the concepts of scarcity and choice The economic problem looks at: –What goods or services the economy should produce –How these should be produced –For whom these goods / services should be produced for

What goods and services should be produced As resources are scarce there needs to be a choice of what should be produced Need to decide what types of goods and services an economy should produce e.g. agriculture or leisure

How should goods and services be produced? What are the best ways of producing the chosen goods / services This looks at production processes Decision whether to use labour or capital intensive methods

For Whom Should Goods / Services Be Produced Should everyone receive goods / services in the same amount Should some people receive more than others Should goods / services be allocated by peoples ability to pay or by other factors?

Opportunity cost When making these decisions it is important for firms to assess the opportunity cost of their decisions Opportunity cost is the cost of the next best alternative

Scarcity and Choice - Decisions In reality decisions regarding the economic problem are likely to be taken with regard to both economic and non economic considerations

Production possibility frontiers These show the potential combinations of goods and services that an economy is able to produce with a certain amount of resources If an economy is operating at a point that is inside the curve it is inefficient It is not possible for an economy to operate at a point outside the curve To operate outside the curve the curve needs to be shifted – this can be done through having more resources or using resources more efficiently

Production Possibility Frontiers This is an example of a production possibility frontier with two products – food and computers Points Q,R, T and V all represent different choices on the PPF The trade off or opportunity cost of point Q is one computer

Value Judgements Economists often make a number of judgements these can be: –Positive statements – these are supported by facts –Normative statements – these contain a “value judgement” which can not be supported by facts Normative statements describe what the economy should look like Normative economics looks at the desirability of certain parts of the economy

Summary The main purpose of economic activity is to provide goods and services to meet needs and wants The four key economic resources are land, labour, capital and enterprise Individuals, firms and governments seeks to maximise economic benefits Firms seek to maximise their profits The government has four key economic objectives: to have full employment, stable prices, high and sustainable economic growth and a balance of payments equilibrium All resources are scarce and therefore there needs to be choices about how they are utilised Opportunity cost is the cost of the next best alternative Production possibility frontiers show the range of possible combinations of goods in an economy, they allow you to assess the trade offs between the production of different goods Value judgements are the basis of normative economics and they look at what should happen