Economy: an area where people and firms produce, trade and consume

goods and services. This can vary in size- from your local town to your
country, or the globe itself.

Microeconomics and
Macroeconomics
Microeconomics is the study of individual markets. For example:
studying the effect of a price change on the demand for a good.
Microeconomic decision makers are producers and consumers (who
directly operate in markets)
Macroeconomics is the study of an entire economy, as a whole.
Examples include studying the total size of the economy or the
unemployment rate, among other things. Macroeconomic decisions are
made by the government of the particular economy – a town, state or
country)

The Nature of the Economic Problem

Resources: are the inputs required for the production of goods and
services.

Scarcity: a lack of something (in this context, resources).

The fundamental economic problem is that there is a scarcity of

resources to satisfy all human wants and needs. There are finite
resources and unlimited wants. This is applicable to consumers,
producers, workers and the government, in how they manage their
resources.

The basic economic problem of scarcity creates three key questions

 What to produce?
 How to produce?
 For whom to produce?

Mobility of Factors
 Refers to the degree of mobility while changing from one production
area to another.

Geographical Mobility Occupational Mobility

Refers to the willingness and the Refers to the ease with which
ability of a person to relocate from a person can change
one area to another due to between jobs.
 Geographical Mobility Occupational Mobility
employment purposes.
This would vary depending
Reasons why many workers are not
on the cost, training period
willing to relocate - Family Ties and
and the educational
Related Commitments, Cost of Living
professions

Changes in the Quantity or the Quality of Factors of Production

 Cost (Labour Costs, Raw materials costs)

 Government Policies (Taxes, Subsidies)
 New Technology
 Migration of Labour
 Improved Education and Healthcare
 Weather Conditions (Agricultural Products)

The Factors of Production

Resources are also called ‘factors of production’ (especially in Business).
They are:

 Land: all natural resources in an economy. This includes the

surface of the earth, lakes, rivers, forests, mineral deposits, climate
etc.
 The reward for land is the rent it receives.
 Since, the amount of land in existence stays the same,
its supply is said to be fixed. But in relation to a country
or business, when it takes over or expands to a new area,
you can say that the supply of land has increased, but the
supply is not depended on its price, i.e. rent.
 The quality of land depends upon the soil type, fertility,
weather and so on.
 Since land can’t be moved around, it is geographically
immobile but since it can be used for a variety of
economic activities it is occupationally mobile

 Labour: all the human resources available in an economy. That

is, the mental and physical efforts and skills of workers/labourers.

 The reward for work is wages/salaries.

 The supply of labour depends upon the number of workers

available (which is in turn influenced by population size, no.
of years of schooling, retirement age, age structure of the
 population, attitude towards women working etc.) and the
number of hours they work (which is influenced by number
of hours to work in a single day/week, number of holidays,
length of sick leaves, maternity/paternity leaves, whether
the job is part-time or full-time etc.).

 The quality of labour will depend upon the skills, education

and qualification of labour.

 Labour mobility can depend up on various factors. Labour

can achieve high occupational mobility (ability to change
jobs) if they have the right skills and qualifications. It can
achieve geographical mobility (ability to move to a place
for a job) depending on transport facilities and costs,
housing facilities and costs, family and personal priorities,
regional or national laws and regulations on travel and
work etc.

 Capital: all the man-made resources available in an economy. All

man-made goods (which help to produce other goods – capital
goods) from a simple spade to a complex car assembly plant are
included in this. Capital is usually denoted in monetary terms as the
total value of all the capital goods needed in production.

 The reward for capital is the interest it receives.

 The supply of capital depends upon the demand for goods
and services, how well businesses are doing, and savings in
the economy (since capital for investment is financed by
loans from banks which are sourced from savings).

 The quality of capital depends on how many good quality

products can be produced using the given capital. For
example, the capital is said to be of much more quality in a
car manufacturing plant that uses mechanisation and
technology to produce cars rather than one in which
manual labour does the work.

 Capital mobility can depend upon the nature and use of

the capital. For example, an office building is
geographically immobile but occupationally mobile. On the
other hand, a pen is geographically and occupationally
mobile.

 Enterprise: the ability to take risks and run a business

venture or a firm is called enterprise. A person who has enterprise
is called an entrepreneur. In short, they are the people who start a
business. Entrepreneurs organize all the other factors of production
 and take the risks and decisions necessary to make a firm run
successfully.
 The reward to enterprise is the profit generated from the
business.

 The supply of enterprise is dependent on entrepreneurial

skills (risk-taking, innovation, effective communication
etc.), education, corporate taxes (if taxes on profits are too
high, nobody will want to start a business), regulations in
doing business and so on.

 The quality of enterprise will depend on how well it is able

to satisfy and expand demand in the economy in cost-
effective and innovative ways.

 Enterprise is usually highly mobile, both geographically and

occupationally.

All the above factors of productions are scarce because the time people
have to spend working, the different skills they have, the land on which
firms operate, the natural resources they use etc. are all in limited in
supply; which brings us to the topic of opportunity cost.

Opportunity Cost
The scarcity of resources means that there are not sufficient goods and
services to satisfy all our needs and wants; we are forced to choose some
over the others. Choice is necessary because these resources have
alternative uses- they can be used to produce many things. But since
there are only a finite number of resources, we have to choose.

When we choose something over the other, the choice that was given up
is called the opportunity cost. Opportunity cost, by definition, is the
next best alternative that is sacrificed/forgone in order to satisfy
the other.

Example 1: the government has a certain amount of money and it has two
options: to build a school or a hospital, with that money. The govt. decides
to build the hospital. The school, then, becomes the opportunity cost as it
was given up. In a wider perspective, the opportunity cost is the education
the children could have received, as it is the actual cost to the economy of
giving up the school.

Example 2: you have to decide whether to stay up and study or go to bed

and not study. If you chose to go to bed, the knowledge and preparation
you could have gained by choosing to stay up and study is the opportunity
cost.

Production Possibility Curve Diagrams

(PPC)
Because resources are scarce and have alternative uses, a decision to
devote more resources to producing one product means fewer resources
are available to produce other goods. A Production Possibility Curve
diagram shows this, that is, the maximum combination of two goods
that can be produced by an economy with all the available
resources.

Production Possibility Curves & Choice

 Opportunity cost can be shown using a production possibility curve

(PPC)
 It shows the maximum combinations of two goods and services that
can be produced by an economy in each period of time with its
limited resources
 Each combination is a choice
 An economy shouldn’t have any unemployment of factors of
resources to be on the PPC
 A point within the curve signifies like X, represents inefficiency
 A point outside the curve like Y, represents combinations that
cannot be produced due to the lack of resources

Movement in PPC and Shift of PPC

Movement in PPC Shift in PPC
Shift in PPC is when the The shift of PPC occurs when the PPC line
 Movement in PPC Shift in PPC
is moved. This may be due to better
resources utilized are availability of resources (due to the
moved from one product Discovery of new materials, Better
to another. For example, Technology and more) which causes an
the Movement from outward shift of the PPC or a decrement in
Point A to Point B in the resources (due to natural disasters, war
above diagram. and more) which causes an inward shift of
the PPC. An example is given below

The Role of Markets in Allocating

Resources
Resource allocation: the way in which economies decide what goods
and services to provide, how to produce them and who to produce them
for.
These questions- what to produce, how to produce, and for whom to
produce – are termed ‘the basic economic questions’. In short,
resource allocation is the way in which economies solve the three basic
economics questions.

Market is any set of arrangement that brings together all the producers
and consumers of a good or service, so they may engage in exchange.
Example: a market for soft drinks.
Goods and services are bought and sold in a market at an equilibrium
price where demand and supply are equal. This is called the price
mechanism. It helps answer the three basic economic questions.
Producers will produce the good that consumers demand the most, it will
be produced in a way that is cost-efficient, and will be produced for those
who are willing and able to buy the product.
Economy: an area where people and firms produce, trade and consume
goods and services. This can vary in size- from your local town to your
country, or the globe itself.

Microeconomics and
Macroeconomics
Microeconomics is the study of individual markets. For example:
studying the effect of a price change on the demand for a good.
Microeconomic decision makers are producers and consumers (who
directly operate in markets)
Macroeconomics is the study of an entire economy, as a whole.
Examples include studying the total size of the economy or the
unemployment rate, among other things. Macroeconomic decisions are
made by the government of the particular economy – a town, state or
country)

The Nature of the Economic Problem

Resources: are the inputs required for the production of goods and
services.

Scarcity: a lack of something (in this context, resources).

The fundamental economic problem is that there is a scarcity

resources to satisfy all human wants and needs. There are finite
resources and unlimited wants. This is applicable to consumers,
producers, workers and the government, in how they manage their
resources.

The basic economic problem of scarcity creates three key questions

 What to produce?
 How to produce?
 For whom to produce?

Mobility of Factors
 Refers to the degree of mobility while changing from one production
area to another.

Geographical Mobility Occupational Mobility