1.1 The economics problem

DEFINITIONS:

1. Economic goods: goods with an opportunity cost when consumed and produced, where there is scarcity involved
2. Free goods: goods that have 0 opportunity cost, where there is no scarcity involved
3. Positive statement: objective, factual statements that can be supported with factual evidence.
4. Normative statement: subjective, value based judgements that represent an opinion
5. Scarcity: the limited nature of resources can not satisfy the unlimited wants of people
6. Basic economic problem: the scarcity of resources means choices have to be made over how to allocate them.

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Key Concepts

Scarcity

• Scarcity means that there are not enough resources to satisfy all human wants. Resources can be classified into four categories:
• Land: Natural resources.
• Labour: Human effort.
• Capital: Machinery, buildings, and infrastructure.
• Enterprise: Entrepreneurial ability.

Choice

• Because resources are scarce, choices must be made about what to produce, how to produce, and for whom to produce. These choices involve trade-offs. Opportunity Cost

• Opportunity cost is the next best alternative foregone when a choice is made. It represents the true cost of choosing one option over another.

Factors of production

Resources used to produce goods and services:

Factor of production	Definition	Examples	Reward
Capital	human made inputs in the production process	machines	interest
Enterprise	an individual that organises other factors of production that produces goods and services	CEOs	profit
Land	the underlying space where production occurs and the natural resources found in or on it	ores, oil, trees	rent
Labour	human workers in the production process	employees	wages

Real World Examples

Healthcare

The allocation of resources in healthcare systems illustrates the economic problem. Governments must decide how much funding to allocate to healthcare versus other areas such as education or defence.

Example: The National Health Service (NHS) in the UK faces decisions about which treatments to fund, often leading to debates about the opportunity costs of different healthcare expenditures.

Consumer Choices

Individual consumers face economic problems daily when deciding how to spend their income. Each purchase has an opportunity cost in terms of other goods and services that could have been bought.

Example: A student choosing to spend money on textbooks instead of entertainment.

Environmental Resources

The use of natural resources like fossil fuels presents an economic problem. Choosing to exploit these resources can lead to economic growth but also environmental degradation, demonstrating a clear trade-off.

Example: The debate over drilling for oil in protected areas versus investing in renewable energy sources.