The Basic Economic Problem content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics: The Basic Economic Opportunity Cost Factors of Production

1. The Economic
Problem
Lower 6th Micro
Nature of Economics
Mr O’Grady

2. The Basic
Economic
Problem
The Economic Problem
Mr O’Grady

3. The Economic Problem
Human Needs: the minimum that is necessary for human survival. FINITE
Human Wants: desires for non-essential consumption. INFINITE
Problem: Resources are scarce (Finite). However, since human wants are unlimited choices must
be made as scarce resources have to be allocated between competing uses.
The Basic Economic Problem: SCARCITY (there aren’t enough resources to meet everyone’s wants)
Three fundamental choices that must be answered to solve the Economic problem:
WHAT is to be produced?
HOW is production to be organised?
FOR WHOM is production to take place?
Examples: Consumers Firms Government

4. Opportunity
Cost
The Economic Problem
Mr O’Grady

5. Opportunity Cost
Assumptions: Available choices can be ranked in terms of the benefits to be
gained. One choice will be the “best” and the others are given up.
Opportunity Cost: The benefit lost from the next best alternative forgone
Example:
NB: OC not just in terms of £s, but also what we have ‘forfeited’ when making our choices.
‘No such thing as a free lunch’
Economic Good: A good which has an opportunity cost
Free Good: where there is no opportunity cost. This as there is zero degree of
scarcity, but abundance. Free goods cannot be traded because nobody would ever
pay for them– there is no point. (air, wind, sea)

6. Factors of
Production
The Economic Problem
Mr O’Grady

7. Factors of Production
Factors of production: the resources used in the production of goods and services
AKA: Factor inputs, inputs, resources
Types: Land, Capital, Labour, Enterprise
Land: Raw Materials used to make goods
All natural resources below the earth, on the earth, in the atmosphere and in the sea - Not just the ground!
Non-Renewable: a natural resource which cannot be replenished (produced, grown or generated) E.g. include
Coal, Oil, Gold, Gas and Copper
Renewable: resources replaced by natural processes consequently they can be used and replaced. E.g. fish,
forests, wind, solar power
Sustainable: replaced by natural processes at a rate comparable or faster than its rate of consumption by humans. They
can be used and replaced, Rate of replenishment > rate of use. E.g. wind, solar power and sometimes fish/ forests
Non-Sustainable: resources which are diminishing over time due to economic exploitation. Rate of replenishment <
rate of use. E.g. some fishing/ forests
Capital: man-made resources used in production of other G&S
Machines, roads, factories, schools, office blocks, etc.
Financial capital refers to money that will be used by a firm to purchase resources later on
Fixed Capital: Includes factories, offices, machinery. Fixed in the sense that it will not be transformed into a final
product
Working Capital: Includes raw materials, semi-manufactured and finished goods waiting to be sold.

8. Labour: Human Input into the Production Process
Skilled, Unskilled, Educated and Uneducated
Human Capital: an individual’s level of skills, qualities and qualifications
Enterprise: Providing the initial ideas and taking risks with their own money
The entrepreneur organises the other 3 Factors of Production
Bill Gates, Jeff Bezos, a trader selling fruit and veg at a market
Factor Incomes
Factor incomes: the income derived from selling the services of the factors of
production
Rents: income from selling/leasing natural resources
Interest: income generated by the use of capital
Wages: income as a reward for labour
Dividends: income that go to the entrepreneurs
Factor Intensity
Capital intensive: Firms which use a higher proportion of capital than labour
Labour intensive: Firms which use a higher proportion of labour than capital

9. Where next?
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