Economic Problems, Scarcity

1. THE BASIC ECONOMIC
PROBLEM
SCARCITY, CHOICE AND
OPPORTUNITY COST
23/10/09 DAVID AKO (DE MEANEST)

2. The Basic Economic Problem
• Key Lesson Objectives
• Differentiate between needs and wants
• Explain the basic economic problem
• Define opportunity cost and illustrate the concept
with examples
• Identify and explain the classification of resources in
economics
• Define economics
• Discuss the importance of studying economics
• Use PPF to illustrate the concept of opportunity cost
23/10/09 DAVID AKO (DE MEANEST)

3. Needs and Wants
• Needs – the necessities of life e.g. Food,
clothing, shelter, warmth, medical care
• Wants – those things that make life enjoyable
and pleasurable e.g. Designer clothes, cars,
mansions
Class Discussion:
• Do needs and wants change over time?
• Why is man never satisfied with material
possessions?
• Human wants are infinite/insatiable/unlimited
23/10/09 DAVID AKO (DE MEANEST)

4. • Every need or want can be satisfied through the
consumption of a good or service
• Goods and services are produced with resources
( factors of production) which are finite and
have alternative uses.
• The Basic /Fundamental economic problem is
the scarcity of resources relative to human
needs and wants
a. Finite resources vrs infinite needs and wants
b. Limited resources vrs unlimited needs and
wants
23/10/09 DAVID AKO (DE MEANEST)

5. 23/10/09 DAVID AKO (DE MEANEST)

6. 23/10/09

7. 23/10/09

8. 23/10/09 )

9. 23/10/09

10. 23/10/09

11. Economic Resources
• These are the factors of production that are used to
produce goods and services.
• Land – all natural resources that are used to produce
goods and services E.g. rivers, forests, mineral
deposits, etc. (receives rent)
• Labour – physical or mental human contribution
towards production. E.g. nurses, doctors, teachers,
labourers (receives wages/salary)
• Capital – man made resources that are used to
produce goods and services . E.g. machinery, buildings,
computers etc.(receives interest)
• Entrepreneur – the individual who takes risk by
employing other resources to produce goods and
services. E.g. Bill Gates, Steve Jobs, (receives profit)
23/10/09

12. 23/10/09 DAVID AKO (DE MEANEST)

13. 23/10/09 DAVID AKO (DE MEANEST)

14. 23/10/09 DAVID AKO (DE MEANEST)

15. 23/10/09 DAVID AKO (DE MEANEST)

16. 23/10/09 DAVID AKO (DE MEANEST)

17. 23/10/09 DAVID AKO (DE MEANEST)

18. 23/10/09 DAVID AKO (DE MEANEST)

19. 23/10/09 DAVID AKO (DE MEANEST)

20. Structured Questions
23/10/09 DAVID AKO (DE MEANEST)

21. 23/10/09 DAVID AKO (DE MEANEST)

22. 23/10/09 DAVID AKO (DE MEANEST)

23. Choice and Opportunity Cost
• Choice is imperative because of scarcity
• The exercise of choice implies the sacrifice or
forgoing of some other need or want
• Opportunity cost is the next best alternative
forgone when choice is made
or
• The benefit that could have been derived from the
next best alternative use of a given resource
• Discussion
When will opportunity cost be zero?
23/10/09 DAVID AKO (DE MEANEST)

24. 23/10/09 DAVID AKO (DE MEANEST)

25. 23/10/09 DAVID AKO (DE MEANEST)

26. 23/10/09 DAVID AKO (DE MEANEST)

27. 23/10/09 DAVID AKO (DE MEANEST)

28. 23/10/09 DAVID AKO (DE MEANEST)

29. 23/10/09 DAVID AKO (DE MEANEST)

30. 23/10/09 DAVID AKO (DE MEANEST)

31. 23/10/09 DAVID AKO (DE MEANEST)

32. Structured Questions
23/10/09 DAVID AKO (DE MEANEST)

33. Classwork
23/10/09 DAVID AKO (DE MEANEST)

34. 23/10/09 DAVID AKO (DE MEANEST)

35. Homework
23/10/09 DAVID AKO (DE MEANEST)

36. Opportunity Cost and the Production
Possibility Frontier
• The PPF is a curve that shows the various maximum
possible combinations of any two goods that can be
produced in an economy given full employment
• Assumptions of PPF
a. There is full employment
b. The economy produces only two goods
c. There is a fixed resource endowment(limited
resources)
d. Technology is constant
e. Resources are occupationally mobile
23/10/09 DAVID AKO (DE MEANEST)

37. Illustration of PPF
• An economy can produce capital goods and food as
illustrated in the table below:
Option Capital Goods
(tonnes)
• These combinations of output can be illustrated as
follows
DAVID AKO (DE MEANEST)
Food
(tonnes)
A 125 0
B 100 50
C 75 100
D 50 150
E 25 200
F 0 250
23/10/09

38. • Capital Goods
X
125 A
100 B F
75 C
50 D
J
25 E
0
Y
50 100 150 200 250 Food
23/10/09 DAVID AKO (DE MEANEST)

39. • What is the opportunity cost of increasing food
production from 100 tonnes to 150 tonnes?
• How much food must be given up if production of
capital goods is increased from combination D to
combination B?
• Why is point F unattainable?
• Note:
a. opportunity cost is measured by the slope/gradient of
the PPF
b. The PPF above has a constant slope. Why is this so?
• Why is point J an inefficient combination?
• Any combination of output that lies on the PPF
indicates efficiency in the allocation of resources
• Any combination of output that lies within the PPF
indicates inefficiency it the allocation of resources
23/10/09 DAVID AKO (DE MEANEST)

40. 23/10/09 DAVID AKO (DE MEANEST)

41. 23/10/09 DAVID AKO (DE MEANEST)

42. 23/10/09 DAVID AKO (DE MEANEST)

43. • How does the slope of a concave PPF change as
increasing quantities of one good is produced?
DAVID AKO (DE MEANEST)
Food
C
A
E
0 F B D
23/10/09

44. Shifts in the PPF
• Causes
a. Technical progress – technological
advancement
b. Increased productivity (efficiency) of labour
c. Increased capital investment
d. Discovery and exploitation of new resources
e. Reallocation of resources
f. Producing in accordance with comparative
advantage
23/10/09 DAVID AKO (DE MEANEST)