*All the notes below have been updated to match the CIE IGCSE Economics
(0455) syllabus for examinations in 2020, 2021 and 2022.
The Basic Economic Problem
A small insight into what is economics, before we start off:
“Economics is the social science that describes the factors that determine the
production, distribution and consumption of goods and services.”
(Source: Wikipedia)
THE NATURE OF THE ECONOMIC PROBLEM
Resources: are the inputs available for the production of good and services.
Scarcity: a lack of something (in this context, resources)
The fundamental economic problem is that there is a scarcity of resources to satisfy
all human wants and needs.There are finite resources and unlimited wants. This is
applicable to consumers, producers, workers and the government, in how they manage
their resources.
Economic goods are those which are scarce in supply and so can only be produced
with an economic cost and/or consumed with a price. Or in other words, an economic
good is a good with an opportunity cost All the goods we buy are economic goods,
from bottled water to clothes.
Free goods, on the other hand, are those which are abundant in supply, usually
referring to natural sources such as air and sunshine.
THE FACTORS OF PRODUCTION
Resources are also called ‘factors of production(especially in Business Studies).They
are:
Land: All natural resources in an economy. This includes the surface of the earth,
lakes, rivers, forests, mineral deposits, climate etc.
The reward for land is the rent it receives
, Since, the amount of land in existence stays the same, it’s supply is said to be
fixed. But in relation to a country or business, when it takes over or expands to
new area, you can say that the supply of land has increased, but the supply is
not depended on it’s price, i.e. rent
The quality of land depends upon the soil type, fertility, weather and so on
Since it can’t be moved around, it is geographically immobile but since it can
be used for a variety of economic activities it is occupationally mobile.
Labour: All the human resources available in an economy. That is, the mental and
physical efforts and skills of workers/labourers.
The reward for work is wages/salaries
The supply of labour is depended upon the number of workers available (which
is in turn influenced by population size, no. of years of schooling, retirement
age, age structure of the population, attitude towards women working etc) and
the number of hours they work (which is influenced by number of hours to
work in a single day/week , number of holidays, length of sick leaves,
maternity/paternity leaves, whether the job is part-time or full-time etc)
The quality of labour will depend upon the skills, education and qualification of
the labour
Labour mobility can depend up on various factors. Labour can achieve high
occupational mobility (ability to change jobs) if they have the right skills and
qualifications. It can achieve geographical mobility (ability to move to a place
for a job) depending on transport facilities and costs, housing facilities and
costs, family and personal priorities, regional or national laws and regulations
on travel and work etc.
Capital: All the man-made resources available in an economy. All man-made
goods (which help to produce other goods – capital goods) from a simple spade to a
complex car assembly plant are included in this. Capital is usually denoted in
monetary terms, as the total value of all the capital goods needed in production.
The reward for capital is the interest it receives
The supply of capital is depended upon the demand for goods and services and
how well businesses are doing. It can be quickly adjusted to demand in the
economy
The quality of capital depends on how many good quality products can be
produced using the given capital. For example, the capital is said to be of much
more quality in a car manufacturing plant that uses mechanisation and
, technology to produce cars rather than one in which manual labour does the
work
Capital mobility can depend upon the nature and use of the capital. For
example, an office building is geographically immobile but occupationally
mobile. On the other hand, a pen is geographically and occupationally mobile.
Enterprise: The ability to take risks and run a business venture or firm is called
enterprise. A person who has enterprise is called an entrepreneur. In short they are
the people who start a business. Entrepreneurs organize all the other factors of
production and take the risks and decisions necessary to make a firm run
successfully.
The reward to enterprise is the profit generated from the business
The supply of enterprise is dependent on entrepreneurial skills (risk-taking,
innovation, effective communication etc), education, corporate taxes (if taxes
on profits are too high, nobody will want to start a business), regulations in
doing business and so on
The quality of enterprise will depend on how well it is able to satisfy and
expand demand in the economy in cost-effective and innovative ways
Enterprise is usually highly mobile, both geographically and occupationally.
All the above factors of productions are scarce because the time people have to spend
working, the different skills they have, the land on which firms operate, the natural
resources they use everything is limited in supply. Which brings us to the topic of
opportunity cost.
OPPORTUNITY COST
The scarcity of resources means that there are not sufficient goods and services to
satisfy all our needs and wants; we are forced to choose what we want. Choice is
necessary because these resources have alternative uses- they can be used to produce
many things. But since, there is only finite resources, we have to choose.
When we choose something over the other, the choice that was given up is called the
opportunity cost. Opportunity cost, by definition, is the next best alternative that is
sacrificed/forgone in order to satisfy the other.
, Example 1: the government has a certain amount of money and it has two options: to
build a school or a hospital, with that money. The govt. decides to build the hospital.
The school, then, becomes the opportunity cost as it was given up. In a wider
perspective, the opportunity cost is the education the children could have received, as
it is the actual cost to the economy of giving up the school.
Example 2: you have to decide whether to stay up and study or go to bed and not
study. If you chose to go to bed, the knowledge and preparation you could have
gained by choosing to stay up and study, is the opportunity cost.
PRODUCTION POSSIBILITY CURVE DIAGRAMS (PPC)
Because resources are scarce and have alternative uses, a decision to devote more
resources to producing one product means fewer resources are available to produce
other goods. A Production Possibility Curve diagram shows this, that is, the
maximum combination of two goods that can be produced by an economy with
all the available resources.
The PPC diagram above shows the production capacities of two goods- X and Y-
against each other. When 500 units of good X is produced , 1000 units of good Y can
be produced. But when the units of good X increases to 1000, only 500 units good Y
can be produced.
