The Economic Problem

1. The Economic Problem

2. Content • Nature and Purpose of Economic Activity • Economic resources • Economic objectives of: • Individuals • Firms • Governments • Scarcity, choice and allocation of resources • Opportunity cost • Value judgements

3. Nature and Purpose Of Economic Activity • The central purpose of economic activity is the production of goods and services to satisfy needs and wants • Goods are tangible products e.g. a car, a loaf of bread • Services are intangible e.g. a haircut, an aeroplane flight • Needs are basic requirements people need to survive e.g. food, shelter • Wants are things that people desire e.g. a sports car

4. Economic Resources • Key resources that businesses use are: • Land • Labour • Capital • Enterprise • Land refers to all naturally occurring resources used to produce goods and services • Labour is the measure of work done by humans to produce goods and services • Capital is the money or wealth used to create goods and services • Enterprise refers to the entrepreneurial skills and abilities that allow risks to be taken and profits to be earned

5. Economic Objectives • Economic objectives are the targets that are set by individuals / firms / governments to achieve • All bodies pursue maximising objectives which aim to get the most out of what they do • Firms are regarded as profit maximisers who attempt to maximise shareholder value and generate funds to support growth • Individuals • Firms • Governments

6. Economic objectives of individuals • Different individuals will have differing objectives • Employees will seek high wages • Shareholders desire maximum profits and dividends • Employers want maximum profits and minimum costs

7. Economic Objectives Of Firms • Firms are regarded as profit maximisers who attempt to maximise shareholder value and generate funds to support growth • Other key objectives include: • Growth by increasing sales / market share • Survival

8. Economic Objectives of Governments • The governments major objectives are: • Full employment or low unemployment • Price stability • High and sustainable economic growth • Balance of payments in equilibrium

9. Economic Resources – Scarcity and Choice • Resources are limited this is the concept of scarcity • Businesses need to choose which resources to use and how to utilise them – this is the concept of choice

10. Scarcity and Choice • Fundamental to this problem are the concepts of scarcity and choice • The economic problem looks at: • What goods or services the economy should produce • How these should be produced • For whom these goods / services should be produced for

11. What goods and services should be produced • As resources are scarce there needs to be a choice of what should be produced • Need to decide what types of goods and services an economy should produce e.g. agriculture or leisure

12. How should goods and services be produced? • What are the best ways of producing the chosen goods / services • This looks at production processes • Decision whether to use labour or capital intensive methods

13. For Whom Should Goods / Services Be Produced • Should everyone receive goods / services in the same amount • Should some people receive more than others • Should goods / services be allocated by peoples ability to pay or by other factors?

14. Opportunity cost • When making these decisions it is important for firms to assess the opportunity cost of their decisions • Opportunity cost is the cost of the next best alternative

15. Scarcity and Choice - Decisions • In reality decisions regarding the economic problem are likely to be taken with regard to both economic and non economic considerations

16. Production possibility frontiers • These show the potential combinations of goods and services that an economy is able to produce with a certain amount of resources • If an economy is operating at a point that is inside the curve it is inefficient • It is not possible for an economy to operate at a point outside the curve • To operate outside the curve the curve needs to be shifted – this can be done through having more resources or using resources more efficiently

17. Production Possibility Frontiers • This is an example of a production possibility frontier with two products – food and computers • Points Q,R, T and V all represent different choices on the PPF • The trade off or opportunity cost of point Q is one computer

18. Value Judgements • Economists often make a number of judgements these can be: • Positive statements – these are supported by facts • Normative statements – these contain a “value judgement” which can not be supported by facts • Normative statements describe what the economy should look like • Normative economics looks at the desirability of certain parts of the economy

19. Summary • The main purpose of economic activity is to provide goods and services to meet needs and wants • The four key economic resources are land, labour, capital and enterprise • Individuals, firms and governments seeks to maximise economic benefits • Firms seek to maximise their profits • The government has four key economic objectives: to have full employment, stable prices, high and sustainable economic growth and a balance of payments equilibrium • All resources are scarce and therefore there needs to be choices about how they are utilised • Opportunity cost is the cost of the next best alternative • Production possibility frontiers show the range of possible combinations of goods in an economy, they allow you to assess the trade offs between the production of different goods • Value judgements are the basis of normative economics and they look at what should happen