4.1.1 - THE ECONOMIC PROBLEM
1. Everyone has basic needs in life - food, water and clothing etc.
2. Everyone also has infinite wants - phones, clothing, cars etc
3. There is a limited amount of resources in the world to satisfy these needs and wants
how can the available scarce resources be used to satisfy people’s infinite needs and wants as effectively as possible?
THE 4 FACTORS OF PRODUCTION
These are Capital, Enterprise, Land and Labour (CELL)
Land
The majority of these resources are scarce
- Non renewable resources (natural gas, oil, coal)
- Renewable resources ( power, wind, wood)
- Material extracted by mining (diamonds, gold)
- Water
- Animals found in the area
Labour
- This is the work done by the people that contribute to the production process
- The population available to do so is called the labour force
- Unemployed: people who are capable and willing to work but who don’t have a job
- Human capital: the value of of a person in the labour force
- E.g this increases with education and specialisation (making you a more scarce resource)
Capital
- Capital is the equipment that is used to aid in the production process
- E.g machines, factories
- Different from land because capital has to be made from natural resources
- Much of it is paid by the government - e.g the country’s road network is a form of capital
Enterprise
- this refers to the people who take risks to create things from the three other factors of production (entrepreneurs)
- Set up and run businesses
- If the business fails, they lose a lot of money (vice versa)
GOODS AND SERVICES
Good : ‘physical’ products you can touch such as washing machines and apples
Services: ‘intangible’ things such a s medical check ups or train journeys
Producers → firms or people that make goods or services
- decide what to make and set a price
Consumers → people or firms who buy the goods and services
- decide what they buy and how much they’re willing to pay for it
Governments → sets the rules that other participants in the economy have to follow, but also produce goods and services
- intervene in the way producers and consumers act (e.g setting a maximum price)
PPF CURVES
Production Possibility Frontiers
These show how to maximise the possible output. This one shows how to maximise the number
of houses and vehicles, using the existing level of resources.
1. Points A,B,C,D are all achievable without using any extra resources. However the
resources must be used as efficiently as possible
2. A movement along the curve corresponds to allocating more resources to the
production of another [A to B means more houses -> less vehicles]
3. In other words this causes a trade-off between building more houses or more vehicles
1
, 4. All points on the PPF curve are productively efficient, because they all maximise output. However they are not all
allocatively efficient because not all points will reflect the wants and needs (more houses are needed than cars)
5. Point E lies outside the PPF curve, so it isn’t achievable using the current level of resources.
6. Point F is inside the curve - this means that making this mix of goods is productively inefficient. Therefore you could
build more houses without making fewer vehicles
SHIFTS IN PPF CURVES
A PPF shows what's possible using a particular level of resources
(e.g. a particular number of people, a particular amount of capital and raw materials, and so
on)
If this level of resources is fixed, then movements along the PPF just show a reallocation of
those resources
However, if the total amount of resources changes, then the PPF itself moves.
For example, increased resources (e.g. an increase in the total number of workers) would
mean that the total possible output of that economy would also increase so the PPF shifts
outward.
For the economy shown by this PPF, the extra output could be either more houses or more
vehicles or a combination of both.
OUTWARDS SHIFTS
● increased total number of workers
● improvements in labour (working conditions)
● improved technology
INWARDS SHIFTS
● natural disasters
● poor health or working conditions
PPF CURVES CAN GROW ON ONE SIDE ONLY
PPF curves can grow just on one side.
This is normally due to improved technology.
In this case, this particular technology only helps with the house-building industry.
This means that the PPF has been stretched only in one direction.
OPPORTUNITY COST
The opportunity cost of a decision is the next best alternative that you give up in making that decision
This is what you give up in order to do something else
- i.e the cost of the choice that is made
- In this case, moving from A to B means you have the opportunity to build 21,500 extra houses at the cost of giving up
40,000 vehicles.
Problems:
1. Often not all alternatives are known
2. Some factors don’t have alternatives
3. There may be a lack of information about the alternatives and their costs
4. Some factors can be hard to switch (e.g land)
2
1. Everyone has basic needs in life - food, water and clothing etc.
2. Everyone also has infinite wants - phones, clothing, cars etc
3. There is a limited amount of resources in the world to satisfy these needs and wants
how can the available scarce resources be used to satisfy people’s infinite needs and wants as effectively as possible?
THE 4 FACTORS OF PRODUCTION
These are Capital, Enterprise, Land and Labour (CELL)
Land
The majority of these resources are scarce
- Non renewable resources (natural gas, oil, coal)
- Renewable resources ( power, wind, wood)
- Material extracted by mining (diamonds, gold)
- Water
- Animals found in the area
Labour
- This is the work done by the people that contribute to the production process
- The population available to do so is called the labour force
- Unemployed: people who are capable and willing to work but who don’t have a job
- Human capital: the value of of a person in the labour force
- E.g this increases with education and specialisation (making you a more scarce resource)
Capital
- Capital is the equipment that is used to aid in the production process
- E.g machines, factories
- Different from land because capital has to be made from natural resources
- Much of it is paid by the government - e.g the country’s road network is a form of capital
Enterprise
- this refers to the people who take risks to create things from the three other factors of production (entrepreneurs)
- Set up and run businesses
- If the business fails, they lose a lot of money (vice versa)
GOODS AND SERVICES
Good : ‘physical’ products you can touch such as washing machines and apples
Services: ‘intangible’ things such a s medical check ups or train journeys
Producers → firms or people that make goods or services
- decide what to make and set a price
Consumers → people or firms who buy the goods and services
- decide what they buy and how much they’re willing to pay for it
Governments → sets the rules that other participants in the economy have to follow, but also produce goods and services
- intervene in the way producers and consumers act (e.g setting a maximum price)
PPF CURVES
Production Possibility Frontiers
These show how to maximise the possible output. This one shows how to maximise the number
of houses and vehicles, using the existing level of resources.
1. Points A,B,C,D are all achievable without using any extra resources. However the
resources must be used as efficiently as possible
2. A movement along the curve corresponds to allocating more resources to the
production of another [A to B means more houses -> less vehicles]
3. In other words this causes a trade-off between building more houses or more vehicles
1
, 4. All points on the PPF curve are productively efficient, because they all maximise output. However they are not all
allocatively efficient because not all points will reflect the wants and needs (more houses are needed than cars)
5. Point E lies outside the PPF curve, so it isn’t achievable using the current level of resources.
6. Point F is inside the curve - this means that making this mix of goods is productively inefficient. Therefore you could
build more houses without making fewer vehicles
SHIFTS IN PPF CURVES
A PPF shows what's possible using a particular level of resources
(e.g. a particular number of people, a particular amount of capital and raw materials, and so
on)
If this level of resources is fixed, then movements along the PPF just show a reallocation of
those resources
However, if the total amount of resources changes, then the PPF itself moves.
For example, increased resources (e.g. an increase in the total number of workers) would
mean that the total possible output of that economy would also increase so the PPF shifts
outward.
For the economy shown by this PPF, the extra output could be either more houses or more
vehicles or a combination of both.
OUTWARDS SHIFTS
● increased total number of workers
● improvements in labour (working conditions)
● improved technology
INWARDS SHIFTS
● natural disasters
● poor health or working conditions
PPF CURVES CAN GROW ON ONE SIDE ONLY
PPF curves can grow just on one side.
This is normally due to improved technology.
In this case, this particular technology only helps with the house-building industry.
This means that the PPF has been stretched only in one direction.
OPPORTUNITY COST
The opportunity cost of a decision is the next best alternative that you give up in making that decision
This is what you give up in order to do something else
- i.e the cost of the choice that is made
- In this case, moving from A to B means you have the opportunity to build 21,500 extra houses at the cost of giving up
40,000 vehicles.
Problems:
1. Often not all alternatives are known
2. Some factors don’t have alternatives
3. There may be a lack of information about the alternatives and their costs
4. Some factors can be hard to switch (e.g land)
2
