Module 1

Unit 1: The Economic problem

The basic economic problem

The basic economic problem is scarcity. The basic cause of this problem is limited resources but unlimited wants. The basic economic problem can be illustrated by every-day global issues, for example:

Many people in third-world countries suffer from starvation due to the lack of food, while there are many countries where a lot of food is wasted every year.

Many people use their cars on a daily basis, which are expensive to run and damage the environment through pollution, meaning that more money has to spent conserving the environment.

Poverty is an example of uneven distribution of wealth, such as in countries like Brazil where the poor live in favelas around the city.

A lot of money is funded for medical research which is not always successful.

The consequence arising from the basic economic problem is that resources have to be rationed among competing demands. Therefore, control mechanisms are used to allocate scarce resources, but they have their disadvantages. for example:

Money - this can be abused or misspent. It also creates inequality, and those with the most determine production

Government - if they can decide what resources are needed, they may become corrupt or anti-democratic.

Economic resources

The purpose of economic activity is to produce goods and services that satisfy human needs and wants.

Economic good - this is a product or service that generates a cost in it's production and/or consumption. This means that resources available for its production are limited and must be rationed among those who need or want it. For example:

Bottled water - cost generated in production

A computer - cost generated in production and consumption

Waste - cost generated in production and consumption

Free good - this is a product or service that does not generate a cost in its production or consumption. For example:

Beaches - naturally occurring land form that is free to use without any restrictions of space

The Sun - natural source of light and heat which can be consumed by anybody

Air - the air around us is free for us to use and generates no cost in production or consumption as it is natural

Factors Of Production

Factors of production are economic resources that can be turned be turned into finished goods that will then satisfy a human need or want. Factors of production are classified under 4 main headings:

1. Land - This represents all the natural resources that are obtained from land such as minerals, gases, oil, food etc. Natural resources can then be divided into renewable and non-renewable resources:

Renewable resources can be replaced once they are consumed.

A non-renewable resource is finite meaning that it cannot be replaced once it has been consumed.

2. Labour - This represents the quality and quantity of the workforce available.

The quality is determined by factors such as:

-Education
-Technology
-Motivation
-Management

The quantity is determined factors such as:

-School leaving age
-Retirement age
-Migration (immigration and emigration)

3. Capital - This is any man-made resource that is used in the production of goods and services such as tools, machines, factories, offices, roads etc. There are 2 types of capital:

Working capital - this is resources tied up in stock of raw materials, work in progress and finished goods and cash. Therefore the business will want to turn this into something they can sell in order to make a profit.

Fixed capital - this is the stock of buildings , factories and machines etc. The business needs these resources in order to turn working capital into goods that can be sold.

4. Enterprise - This represents the ability of individuals and firms to turn factors of production into finished goods that can be sold for a profit. Enterprise takes place in two forms:

The ability to combine factors of production in a profitable way.

The willingness of an individual to take risks with their own and others money.

Economic Agents

Economic agents is the term given to individuals, firms and governments who carry out and are affected by economic decisions. The 3 economic agents are:

1. Individuals - their objectives:

To make money in order to survive and provide for their family

To acquire luxuries to improve standards of living

To obtain a degree through a good education to get the best job they can

To live a long, healthy and happy life

2. Firms - their objectives:

To increase sales and lower production costs to maximise profits

To increase growth and market share

To gain global recognition and go down in history

3. Government - their objectives:

To make sure they make the right decisions

To set the right amount of tax which is both fair and economic

Control price inflation

To ensure stability to reduce the likelihood of a crash

	Created by Amardeep Kumar almost 10 years ago

A levels Economics (Module 1: Markets and Market Failure) Note on Economics - Module 1 - Unit 1 & 2, created by Amardeep Kumar on 15/02/2015.