The Economic Problem

The Economic Problem

Scarcity and Choice

• Scarcity refers to limited resources available to meet unlimited human wants and needs.
• Choice must be made about how to best use these scarce resources – this choice can be seen on an individual, business, and societal level.

Opportunity Cost

• The concept of opportunity cost must be understood – it refers to the next best alternative that is given up when a choice is made.
• For example, if a business chooses to invest its profits back into research and development, the opportunity cost may be the potential profits that could have been generated if the money was instead spent on marketing.

Production Possibility Frontier (PPF)

• The Production Possibility Frontier (PPF) is a concept that shows the different combinations of goods or services that can be produced with a fixed amount of resources.
• PPF is useful in understanding the concepts of scarcity, choice, and opportunity cost as production beyond PPF is not possible given the current resources.

Economic Systems

• Economic systems are methods by which countries or societies distribute resources.
• Different systems include market economy (resources are allocated through supply and demand), command economy (resources are allocated by the government), mixed economy (combination of market and command economy).
• These systems answer the three key economic questions: what to produce, how to produce, and for whom to produce.

Factors of Production

• Factors of production include land (natural resources), labour (human inputs), capital (machinery, buildings, technology), and enterprise (organisation and risk-taking ability).
• For businesses to produce goods and services, they must have access to and effectively use these factors of production.

Economic Sectors

• The economic sectors, primary (extractive, farming), secondary (manufacturing, processing) and tertiary (services, nursing) also play a crucial role in understanding the economic environment.