Basic Economic Problems

THE BASIC ECONOMIC PROBLEM

SCARCITY, CHOICE AND OPPORTUNITY COST

DAVID AKO (DE MEANEST)23/10/09

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

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

• 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 wantsb. Limited resources vrs unlimited needs and

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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)

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Structured Questions

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?

Structured Questions

Classwork

Homework

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 PPFa. There is full employmentb. The economy produces only two goodsc. There is a fixed resource endowment(limited

resources)d. Technology is constante. Resources are occupationally mobile

Illustration of PPF• An economy can produce capital goods and food as

illustrated in the table below:

• These combinations of output can be illustrated as follows

DAVID AKO (DE MEANEST)

Option Capital Goods (tonnes)

Food(tonnes)

A 125 0

B 100 50

C 75 100

D 50 150

E 25 200

F 0 250

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• Capital Goods X 125 A

100 B F

50 D J 25 E

0 Y 50 100 150 200 250 Food

• 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 PPFb. 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 resourcesDAVID AKO (DE MEANEST)23/10/09

• How does the slope of a concave PPF change as increasing quantities of one good is produced?

DAVID AKO (DE MEANEST)

0 F B D

23/10/09

Shifts in the PPF• Causesa. Technical progress – technological

advancementb. Increased productivity (efficiency) of labourc. Increased capital investmentd. Discovery and exploitation of new resourcese. Reallocation of resourcesf. Producing in accordance with comparative

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