Basic Economic Problems: notes

Scarcity and choice

• Scarcity: resources are limited but wants are unlimited, so people must choose.
• Opportunity cost: the next best choice given up. If a farmer plants maize instead of tobacco, the lost tobacco is the cost.
• Needs and wants: needs are things we must have to live, such as food and shelter. Wants are things we would like.

Factors of production

• Land: natural resources. Its reward is rent.
• Labour: human effort. Its reward is wages.
• Capital: man-made goods used to make other goods. Its reward is interest.
• Enterprise: the person who organises production and takes risks. Its reward is profit.

Systems and questions

• Three basic questions: what to produce, how to produce and for whom.
• Market system: prices and private firms decide. Command system: the state decides. Mixed system: both share the work.
• Specialisation: each worker does one task, which raises output but can cause boredom.