Topic 1 of 6 · Form 3
The basic economic problem
Economic goods are scarce because resources are limited and wants are unlimited; free goods (e.g. air) have no opportunity cost.
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Scarcity and choice
Economic goods are scarce because resources are limited and wants are unlimited; free goods (e.g. air) have no opportunity cost.
Factors of production
Land (rent), labour (wages), capital (interest) and enterprise (profit); mobility of factors (occupational and geographical); changes in quantity and quality of factors.
Opportunity cost
The next best alternative forgone; applies to consumers, workers, firms and governments.
Worked example: A government spends US$10 million on a new road instead of a hospital. What is the opportunity cost?
The hospital (and the health benefits it would have provided).
Production possibility curves (PPC)
Show maximum combinations of two goods; points inside (underused resources), on (efficient) and outside (unattainable); movements along show opportunity cost; outward shifts show economic growth.
Economic questions
What to produce, how to produce and for whom.
Check yourself
- Why is air usually a free good?
- What does an outward shift of the PPC show?
- Name the reward to enterprise.
Show answers
- It is not scarce, so using it involves no opportunity cost.
- Economic growth – an increase in productive capacity.
- Profit.
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