3.1.1.

The Economic Problem

Goods and Services Economic welfare Opportunity cost Economic goods Free goods Factor market Renewable resources Profit Free market economy Production possibility boundary Productive efficiency Allocative efficiency Productivity Human capital Division of labour Specialisation Value Judgement Normative statements Positive statements
Goods are considered to be tangible products, while services are not tangible but of which the benefits are received. Refers to the benefit or satisfaction an individual or society gets from the allocation of resources. The next best alternatives forgone (given up) when an economic decision is made. Goods that are scarce and therefor have an opportunity cost. Goods that have no opportunity cost, for example, air. The market for the factors of production that make other goods and services. Resources that are able to be replenished over time. When total income or revenue for a firm is greater than total costs. One in which there is very limited government involvement in providing goods and services. Its main role is to ensure that the rules of the market are fair. The PPB indicates the maximum possible output that can be achieved given a fixed set of resources and technology in a particular time period. When a firm operates at minimum average total cost, producing the maximum possible output from inputs into the production process. This is achieved in an economy when it is not possible to make anyone better off without making someone worse off, or you cannot produce more of one good without making less of another. A measure of efficiency, measuring the ratio of inputs to outputs. The skills and abilities of labour. Breaking the production process into specific tasks, with workers assigned in each task. The production of a limited range of goods by an individual factor of production/firm/country in cooperation with others to produce a complete range. Statements or opinions expressed that are not testable and depend on individual views. Opinions that require value judgements to be made. Statements that can be tested against real-world data.

The Nature and Purpose of Economic Activity: Purpose of economic activity is the production of goods and services to satisfy needs and wants, and thereby to improve economic welfare. An economic system attempts to solve: 1. What should we produce? 2. How should we produce it? 3. For whom should it be produced? Economics tries to provide a logical way of answering these questions. Fundamental economic problem infinite wants and yet limited resources. Each choice will carry an opportunity cost. When we ask whether an activity increases economic welfare, what is the opportunity cost of that decision? This is due to scarcity resources arent infinite. Economic Resources: Factor of Production: Land All the resources we take from the world. Labour All the potential workforce and their skills. Capital Stock of goods used to make other goods and services. Enterprise Risk takers who are prepared to bring the other factors of production to make goods and services.

Reward/Payment: Rent Wages Interest Profit

Leads to factor incomes owners of factors can sell/loan them and in return receive payment.

The Economic Objectives of Individuals, Firms and Government: Consumers Objective is to maximise economic well-being Workers Maximise gains from working higher wages, job security, better working conditions. Firms Maximise profits, though changes (e.g. several shareholders) Governments Act in the peoples interests, but there are also different motives: Political objectives Conflicting interests of people In the case of government involvement, there are different economic systems: Market Economy Command Economy centrally planned
Individual freedom Able to change slowly Lack of government interference Variety of goods and services High consumer satisfaction Promotes economic freedom and growth Doesnt protect vulnerable Market failures happen leading to boom and bust Doesnt promote economic security, equity, efficiency Change can occur quickly Promotes economic security, efficiency and equity Doesnt meet wants and needs of consumers Lack of incentive Bureaucratic; consumes resources Inflexible to daily changes Innovation discouraged Doesnt promote economic growth or freedom.

Scarcity, Choice and the Allocation of Resources: Prices and profits have three key functions: Incentive function Rationing function Signalling function Production Possibility Boundary: All points on the PPB is productively and allocatively efficient It isnt possible to achieve output levels beyond the PPB Points within the PPB dont use resources to their full capacity in this case its possible to increase output and welfare without any changes in resources and technology. Shifting between two points on the PPB will always carry an opportunity cost. Factors shifting the PPB: Investment in new technology Introduction of new resources such as minerals Increased supply of labour through increases in population and migration Improvements in human capital through education and training Better management of resources via division labour and specialisation Changed attitudes encouraging entrepreneurialism Value judgements Normative statements Positive statements based on opinion or viewpoint opinions that require value judgements to be made. statements that can be tested against real-world data.