Basic Economic

Problems

史治承 Jason
 Part 1

The Nature of
Economic
Problems
FINITE RESOURCES VS.
UNLIMITED WANTS
The fundamental economic problem arises because resources(inputs) are scarce while people’s
wants
are unlimited. (Unlimited wants exceeding Limited resources)
Resources: factors used to produce goods and services
Scarcity: a situation where there is not enough to satisfy everyone’s wants.
Choice: The scarcity of resources give rise to taking decisions on how to allocate scarce
resources
between competing uses.
FINITE RESOURCES VS.
UNLIMITED WANTS
The economic problem in different contexts:
1.Consumers: limited incomes against unlimited wants for consumption goods and
services;
2.Producers: limited capitals or fund against unlimited wants to produce and make
profits;
3.Government: limited government income against unlimited wants to spend;
4.Workers: limited times against unlimited wants to take jobs and earn.
You should be able to give one or two examples for each scenario above.
ECONOMIC&FREE GOODS
The majority of goods are economic
goods: takes resources to produce
them and so their supply is limited.
1. usually come with a price

2. involve an opportunity cost

Free goods: a good or service that is
not scarce and is available in
abundance:
1. free of charge(exceptions!)

2. takes no resources to produce them

3. zero opportunity cost

Try to distinguish between economic

goods and free goods:
A. air

B. education

C. newspaper

D. public library

E. state education
FINITE RESOURCES VS.
UNLIMITED WANTS
What is the cause of the economic problem facing all
countries?
a)climate change and global warming
b)significant quantities of unemployed resources
c)uneven distribution of income and wealth
d)unlimited wants in relation to limited resources
FINITE RESOURCES VS.
UNLIMITED WANTS
W18_13Q2
Hospital services are provided by the government and paid
for through taxation. People cannot always get
the treatment they require because of long waiting lists.
A. external cost

B. market system

C. perfectly inelastic supply

D. scarcity
 Part 2

Factors of Production
FACTORS OF PRODUCTION

Economists refer to resources available in the economy as the factors of production:

1. Land
2. Labor
3. Capital
4. Enterprise
In each dimension above we shall discuss its definition, rewards, mobility and factors
influencing its quantity&quality.
LAND

Land is a general term including all the natural resources which are used in production:
. Includes the earth in which crops are grown, and on which offices and factories are built.
. Beyond the scope of physical space: also includes the natural resources which occur naturally on
the land:
all the resources beneath the surface or the climates above.
. e.g. swimming pools, fishing lakes, safari parks, etc.
. The reward for owing land is the rent or income that its owners receive.
. Mobility: mostly occupationally mobile and geographically immobile(diversion&moving wildlife).
. Quantity: degree of erosion; ease of reclamation; renewability, etc.
. Quality: fertilizing; purity; pollution; drainage level, etc.
LABOR

Labor is the human resources available in any economy.

. Also known as human capital: involves all the mental and physical efforts.
. Reward: wage or earnings paid for labour services. The payment received depends on the value
of labor
to whoever is hiring the labor.
. Mobility:
1.Geographical mobility depends on: housing price differences, family ties, education systems, lack
of
information, restrictions. etc.
2.Occupational mobility depends on: lack of information, lack of skills and qualifications.
. Quantity(labor force): size of population, age structure, retirement age, school leaving age,
attitude to
working women, numbers of hours worked(length of holidays, overtime duration), etc.
. Quality(productivity): education, training, experience, health level, etc.
CAPITAL
Capital is a type of physical resources including anything that can be regarded as made by
humans to aid
production.
. More correct term: physical capital:
1. they are not wanted for their own sake but for what they can produce(in contrast of consumer

goods).
2. to distinguish between them, consider the user and the purpose of its use.
. Include range of items such as factories, offices, machinery, IT, vehicles, etc.
. Reward: financial interest that is earned or if the capital resources are rented.
. Mobility:
1.Geographical mobility depends on: type of capital goods,
2.Occupational mobility depends on: usage and purpose of capital goods
. Quantity: investment level, replacement, depreciation level.
(gross investment - depreciation = net investment)
. Quality: technology, innovations.
ENTERPRISE

A form of human capital.

. It is comprised of two parts:
1.Organization of factors of production to produce goods and services;
2.the ability and inventiveness of the entrepreneurs who are prepared take
risks.
. Reward: the profit that individuals make by successful business.
. Mobility: totally depends on the mobility of entrepreneurs.
Enterprise seems to be the most mobile factor among these four.
. Quantity: education, tax rates, regulations, immigration.
. Quality: education&training, health care, experience, knowledge and
understandings.
FACTORS OF PRODUCTION
What would be classified by an economist as the factor of production known as
land?
A. a discovery of oil in the south china sea

B. an oil rig bought by an oil company

C. money held by the oil companies in their bank accounts

D. the productivity of oil workers

FACTORS OF PRODUCTION

W18_12Q1
Which factor of production is not represented in the list shown?
banana, a factory, goats, a risk taking investor
A. capital

B. enterprise

C. labor

D. land
FACTORS OF PRODUCTION
S18_22 Q3a
Identify two examples of capital goods that may be
used by a farm[2]
FACTORS OF PRODUCTION
S18_22 Q3a
Identify two examples of capital goods that may be
used by a farm[2]
example answer:
cattle ranching
tractors
farm buildings
irrigating systems
FACTORS OF PRODUCTION
W18_22 Q7a
Identify two factors of production involved in mining
gold.[2]
FACTORS OF PRODUCTION
W18_22 Q7a
Identify two factors of production involved in mining
gold.[2]
sample answer:
land: gold ore(mine)
capital: mining equipments, extractor
labor: miner
enterprise: mine owner
 Part 3

Opportunity Cost
OC IN CONTEXTS

Given limited resources and unlimited wants(in Section One), individuals, firms and government
all
need to make choices which wants to satisfy.
The true cost of any choice we make between alternatives is expressed through the notion of
opportunity
cost: the best alternative forgone.
(Opportunity cost is a recurring topic throughout the economics, whenever you are considering
situations
where choices are being made, OC is advised to be mentioned and briefly explained with
examples).
An example may be choosing between going shopping over visiting friend: the opportunity cost is
a visit
to your friend, including all the utilities got from doing so(visiting friend is the next best alternative
choice
after going shopping!)
INFLUENCE OF OC ON
DECISION MAKING
OC and consumers:
1. Consumers purchase consumer goods based on their prices and accuracy of information coverage.

2. The closer two choices are in quality and price based on current information level, the harder the
choice.
OC and workers:
1. Undertaking a job involves opportunity cost.

2. Job seekers have more factors to consider: wage, chances of promotion and job satisfaction.

3. eg. a teacher may also want to work as civil servant, what is the opportunity cost of being a

teacher? how
will it change when the pay of civil servant increases?
OC and producers:
1. Producers decide what to make: which bases on the maximum profits given the current level of
factors of
production.
2. eg. A farmer may choose to produce apples over banana using a field, the opportunity cost of this
involves
the profit that would have be made by growing banana(including the change in demand for bananas
and
production methods).
OPPORTUNITY COST
S18_11Q1
The Norwegian government chose to spend the profits from oil on
stocks, bonds and property. The
possibility of improving domestic infrastructure, therefore, was not
taken.
Which economic concept does this best illustrate?
a. cost of production
b. finite resources
c. opportunity cost
d. production possibility frontier
OPPORTUNITY COST
w18_22_SAf
The Liberian government is providing subsidies to local rubber farmers to help them buy
new equipment and introduce new farming methods. Despite the challenging situation, a
number of local Liberian rubber farmers are increasing the size of their operations by
buying up more land. Some others are diversifying by using wood from the rubber trees to
make furniture.
f. Explain, using information from the extract, how the concept of opportunity cost affects
all
rubber farmers in Liberia. (try to explain in 3 dimensions) （ 4 ）
OPPORTUNITY COST
w18_22_SAf
The Liberian government is providing subsidies to local rubber farmers to help them buy
new equipment and introduce new farming methods. Despite the challenging situation, a
number of local Liberian rubber farmers are increasing the size of their operations by
buying up more land. Some others are diversifying by using wood from the rubber trees to
make furniture.
f. Explain, using information from the extract, how the concept of opportunity cost affects
all
rubber farmers in Liberia. (try to explain in 3 dimensions) （ 4 ）
Opportunity costs is the (next) best alternative foregone.
The local farmers could sell rubbers or rubber wood / make furniture;
The farmers could use the money to buy more land, diversify into other areas: education
for their children;
Subsidies to farmers, could be used to help them in other ways e.g. education.
 Part 4

Production Possibility
Frontier(Curve)
DEFINITION OF PPF/PPC
A production possibility curve is known to show the choices available and how resources are
allocated.
It shows the maximum combination of goods and services that can be produced of an economy
in each
period of time with its limited resources.
It is a bowed or curves outwards based on two goods and services.

It shows that the country could either

produce 700
agricultural products or 500 manufactured
products
or a range of combinations along the curves,
every
point is a choice.
From point p to q, the opportunity cost of
producing
some amount of manufactured goods are the
agricultural
products that it sacrificed.
Every point on the curve represents one
MOVEMENT ALONG PPF

Consider this graph carefully, what will the

opportunity
cost change as we move along the x-
axis(manufactured
goods)? Does it always change in the same way?
Why
do you think it will have this pattern?
MOVEMENT ALONG PPF

Consider this graph carefully, what will the opportunity

cost change as we move along the x-axis(manufactured
goods)? Does it always change in the same way? Why
do you think it will have this pattern?
1.As we move along the curve we observe that the
amount
of agricultural products that need to be sacrificed to get
the same amount of manufactured products increase, so
the opportunity cost increases!
2.The tendency continues from 0 value to 500 units
3.Because the two goods require different factors of
production
then more factors(more productive capacity) need to be
given
up to increase the production of the other products.
STRAIGHT LINE PPF

The straight line means that opportunity cost is constant as the economy moves from one point to
another
on the PPF: they require the same factors of production and each factor can be equally effective in
producing
any of these two products.
POINTS RELATING PPF
Point A, B represent an efficient allocation of resources(maximum level of output);
Point C indicates there are unemployed resources: inefficiency!
Point D is outside the current PPF: require more resources(represents a position of ______).
SHIFT OF PPF
The outward shift of PPF indicates an increase in the
quantity or quality of factors of production(resources)
All combinations on the PPF are higher than before.
Vice versa for an inward shift of PPF.

Think Actively:
1.does OC changes?
2.what will the PPF look like if only factors regarding to one of the products change? will OC
changes?
OPPORTUNITY COST
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OPPORTUNITY COST
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OPPORTUNITY COST
OPPORTUNITY COST
THANKS