Deciding on what to produce Resources found on earth are finite or in limited supply such as: Crude oil Gold Aluminum It is often said that the central purpose of economic activity is the production of goods and services to satisfy our changing wants and needs. Economists therefore say that resources are SCARCE. Resources that are scarce are called ECONOMIC GOODS. Not all resources are scarce, resources that are not scarce are called FREE GOODS.

Managing scarce resources Since resources to produce goods and services are scarce a choice must be made to decide what to produce from them. For example, furniture and houses can be made from timber so a decision needs to be made whether to cultivate trees for furniture or houses. Similarly, if a government spends too much money on building skills then it will not be able to spend much on training extra doctors Businesses must satisfy peoples’ wants and needs. People’s needs are limited/finite – they include things that are needed to survive such as food, warmth, shelter and clothing. Others are psychological and emotional needs. However wants are unlimited/infinite. People constantly aim for a better quality of life, which might include better housing, better health care, education, longer holidays etc.

unlimited wants +limited resources = scarcity Therefore, the basic economic problem unlimited wants +limited resources = scarcity The BASIC ECONOMIC PROBLEM forces economic agents to make choices. They have to allocate their scarce resources between competing uses. The success of a business activity depends on many factors, the most important is to supply a good or service that the consumers want to buy or pay for.

Opportunity Cost This leads to the concept of Opportunity Cost: The benefit that is sacrificed by choosing one course of action rather than the next best alternative.

In 2015 he spent £748 billion, in 2016 £760 billion will be spent.

Questions Using the example explain in your own words the term opportunity costs. Using examples explain how differently you would have spent the budget in comparison to the government. Explain what the possible cost would have been through your choice.

Key terms Goods are tangible, items that are physical where services are intangible which are done for us. Goods come in many forms; Consumer goods, consumer goods are goods that are ultimately consumed, the final product. Capital goods, is a durable good that is used in production of goods or services. Public goods, services such as national defence, law enforcement, and road building, that are for the benefit of, and available to, all members of the public. Merit goods, goods or services (such as education and vaccination) provided free for the benefit of the entire society by a government, because they would be under-provided if left to the market forces or private enterprise. Demerit goods, a good which is considered unhealthy or damaging in some way. A demerit good can be physically harmful. In many cases, demerit goods are subject to additional taxes in an effort to reduce consumption

Test your knowledge

Markets In groups identify different business types within our home market, which type of good do they produce or offer.