The Economic Problem

Definition: Opportunity cost

The cost of missing out on the next best alternative. Economic goods Goods that are scarce and therefore have an opportunity cost. Free goods Goods that have no opportunity cost, e. G. Air Factor market The market for the factors of production that make other goods and services such as labor or raw materials. Free market economy One in which there is very limited government involvement in providing goods and services. Division of labor Dividing one task into many little ones. Value Judgments Opinions or statements which depend on the views of the individual

Normative statements Opinions that cannot be proven or tested. Positive statements Statements that can be tested against real world data. Factors of Production:

1 . Land [Resources]

2. Labor [Workers

3. Capital [Money or Machinery]

4. Enterprise [Entrepreneurs]

Economic Objectives: Government/ State [Want to give out grants to new businesses as they will create more Jobs and pay a substantial amount of tax which will go into the economy], Consumers [They want good quality and the product/service to be at a good price]

Also some workers will accept a lower pay if other benefits emerge, egg. Healthcare. Firms/ Business [Their main objective is to maximize profits. Also to spend less on raw materials] Prices & Profits have three key functions: 1. Incentive function 2. Rationing function 3. Signaling function When prices rise consumers tend to ration (cut down) their demand. When prices fall consumers extend their demand (an end to rationing). The Production Possibility Boundary (BP) The key problem in economics is that we have to make choices, because there are not enough resources to provide everything we want.

The shortage is known as scarcity. However, if we chose to use the resources to produce one good or service, we cannot use them to produce something else. Giving up the 'something else' is called the opportunity cost. If there is no opportunity cost in producing something, it is known as a free good. The resources we can use are divided into four types; land, labor, capital and enterprise. Collectively, they are know as factors of production and the key mechanism in market economics in deciding where they are used is the price mechanism.