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3.1.1. The Economic ProblemGoods and Services Goods are considered to be tangible products, while services are not tangible but of which the benefits are

received.

Economic welfare Refers to the benefit or satisfaction an individual or society gets from the allocation of resources.

Opportunity cost The next best alternatives forgone (given up) when an economic decision is made.

Economic goods Goods that are scarce and therefor have an opportunity cost.

Free goods Goods that have no opportunity cost, for example, air.

Factor market The market for the factors of production that make other goods and services.

Renewable resources Resources that are able to be replenished over time.

Profit When total income or revenue for a firm is greater than total costs.

Free market economy One in which there is very limited government involvement in providing goods and services. Its main role isto ensure that the rules of the market are fair.

Production possibility

boundary

The PPB indicates the maximum possible output that can be achieved given a fixed set of resources and

technology in a particular time period.

Productive efficiency When a firm operates at minimum average total cost, producing the maximum possible output from inputsinto the production process.

Allocative efficiency This is achieved in an economy when it is not possible to make anyone better off without making someoneworse off, or you cannot produce more of one good without making less of another.

Productivity A measure of efficiency, measuring the ratio of inputs to outputs.

Human capital The skills and abilities of labour.

Division of labour Breaking the production process into specific tasks, with workers assigned in each task.Specialisation The production of a limited range of goods by an individual factor of production/firm/country in cooperation

with others to produce a complete range.

Value Judgement Statements or opinions expressed that are not testable and depend on individual views.

Normative statements Opinions that require value judgements to be made.

Positive statements Statements that can be tested against real-world data.

The Nature and Purpose of Economic Activity:

Purpose of economic activity is the production of goods and services to satisfy needs and wants, and thereby to improve

economic welfare. An economic system attempts to solve:

1. What should we produce?2. How should we produce it?3. For whom should it be produced? Economics tries to provide a logical way of answering these questions.

Fundamental economic probleminfinite wants and yet limited resources. Each choice will carry an opportunity cost.

When we ask whether an activity increases economic welfare, what is the opportunity cost of that decision? This is due to

scarcityresources arent infinite.

Economic Resources:

Factor of Production: Reward/Payment: Leads to factor incomesowners of factors can

sell/loan them and in

return receive payment.

Land All the resources we take from the world. Rent

Labour All the potential workforce and their skills. Wages

Capital Stock of goods used to make other goods and services. Interest

Enterprise Risk takers who are prepared to bring the other

factors of production to make goods and services.

Profit

The Economic Objectives of Individuals, Firms and Government:

Consumers Objective is to maximise economic well-beingWorkers Maximise gains from working higher wages, job security, better working conditions.

Firms Maximise profits, though changes (e.g. several shareholders)

Governments Act in the peoples interests, but there are also different motives:

Political objectives Conflicting interests of people

In the case of government involvement, there are different economic systems:

Market Economy Command Economy centrally planned Individual freedom Able to change slowly Lack of government

interference

Variety of goods and services High consumer satisfaction Promotes economic freedomand growth

Doesnt protectvulnerable

Market failureshappen leading to

boom and bust

Doesnt promoteeconomic security,equity, efficiency

Change can occurquickly

Promotes economicsecurity, efficiency

and equity

Doesnt meet wants and needsof consumers

Lack of incentive Bureaucratic; consumes

resources

Inflexible to daily changes Innovation discouraged Doesnt promote economic

growth or freedom.

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Scarcity, Choice and the Allocation of Resources:

Prices and profits have three key functions:

Incentive function Rationing function Signalling function

Production Possibility Boundary: All points on the PPB is productively and allocatively efficient It isnt possible to achieve output levels beyond the PPB Points within the PPB dont use resources to their full capacityin this case its possible to increase output and

welfare without any changes in resources and technology.

Shifting between two points on the PPB will always carry an opportunity cost.Factors shifting the PPB:

Investment in new technology Introduction of new resources such as minerals Increased supply of labour through increases in population and migration Improvements in human capital through education and training Better management of resources via division labour and specialisation Changed attitudes encouraging entrepreneurialism

Value judgements based on opinion or viewpoint

Normative statements opinions that require value judgements to be made.

Positive statements statements that can be tested against real-world data.