Unlimited Wants Scarce Resources – Land, Labour, Capital, Entrepreneurship Resource Use Choices The Economic Problem

O What goods and services should an economy produce? – should the emphasis be on agriculture, manufacturing or services, should it be on sport and leisure or housing? O How should goods and services be produced? – labour intensive, land intensive, capital intensive? Efficiency? O Who should get the goods and services produced? – even distribution? more for the rich? for those who work hard? Three economic questions

The excess of wants resulting from having limited resources (land, labor, capital and entrepreneurs) in satisfying the endless wants of people. It is a universal problem for societies – it is not limited to poor countries. To the economist, all goods and services that have a price are relatively scarce. This means that they are scarce relative to people ’ s demand for them. Scarcity

Land - natural resources available for production - renewable resources: those that replenish - non-renewable resources: cannot be replaced Labour - physical and mental effort of people used in production Capital - all non-natural (manufactured) resources that are used in the creation and production of other products Enterprise (Entrepreneurship) - refers to the management, organisation and planning of the other three factors of production Four factors of production (resource types)

Definition – the cost expressed in terms of the next best alternative sacrificed Helps us view the true cost of decision making Implies valuing different choices Opportunity Cost

Since people do not have infinite income, they need to make choices whenever they purchase goods and services. They have to decide how to allocate their limited financial resources and so always need to choose between alternatives. People wants are infinite; resources are finite, therefore, choices must be made. Choice

Consumer goods – products sold to general public Types of Products Capital goods – products purchased by other businesses to produce other goods and services

O Show the different combinations of goods and services that can be produced with a given amount of resources O No ‘ideal’ point on the curve O Any point inside the curve – suggests resources are not being utilised efficiently O Any point outside the curve – not attainable with the current level of resources O Useful to demonstrate economic growth and opportunity cost Production Possibilities Curve

Production Possibility Frontiers Capital Goods Consumer Goods Yo Xo A B Y1 X1 Assume a country can produce two types of goods with its resources – capital goods and consumer goods If it devotes all resources to capital goods it could produce a maximum of Ym. If it devotes all its resources to consumer goods it could produce a maximum of Xm Ym Xm If the country is at point A on the PPC It can produce the combination of Yo capital goods and Xo consumer goods If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods. Production Possibility Curves

Capital Goods Consumer Goods Yo Xo A.B.B C Y1 X1 Production inside the PPC – e.g. point B means the country is not using all its resources It can only produce at points outside the PPC if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards. Production Possibility Curves

Schools Motorcars Y1Y1 Y 0 XX1X1 V W Z Z1Z1 Production Possibility Curves

PPC Practice Draw a PPC showing changes for each of the following: Bacon and lamps(3) 1. Protests against intensive pig farming are successful 2. A new source of lampshade bamboo is found 3. A decrease in the demand for lamps Consumer goods and Capital Goods (4) 4. Ebola outbreak takes 15% of population 5. An increase in demand for consumer goods 6. Inefficient production of consumer goods 7. Global oil supply tightened by OPEC

Protests against pig farming are succesfull Q Q Lamps Bacon 13 A shift inward only for bacon Question #1

A new source of lampshade materials is found Q Q Lamps Bacon Question #2 14 A shift only for lamps

Decrease in the demand for lamps Q Q Lamps Bacon 15 The curve doesn’t shift! A change in demand doesn’t shift the curve Question #3

Ebola outbreak takes 15% of the population Q Q Capital Goods Consumer Goods Decrease in resources decrease production possibilities for both Question #4

An increase in demand for consumer goods Q Q Capital Goods Consumer goods 17 The curve doesn’t shift! A change in demand doesn’t shift the curve Question #5

Inefficient production of consumer goods Q Q Capital Goods Consumer Goods 18 The curve doesn’t shift! Productive inefficiency is just a point inside the curve Question #6

Global oil supply tightened by OPEC Q Q Capital Goods Consumer Goods Decrease in resources decrease production possibilities for both Question #7

The basic economic questions: (1) WHAT to produce (2) HOW to produce it (3) WHO shall receive it Rationing systems

Sometimes called = a centrally planned economy or = a command economy Decisions as what to produce, how to produce, and who to produce for, are made by a central body, the government. All resources all collectively owned. The quantity of decisions to be made, data to be analyzed, and factors of production to be allocated are immense. This makes central planning very difficult. Planned economies

Sometimes called: = a private enterprise economy or = capitalism All production is in private hands Few cases of surpluses and shortages {If there are changes in the pattern of demand, then there will be changes in the pattern of supply in order to meet the new demand pattern} Is a self-righting system Free market economy

In reality, all economies are mixed economies Some countries have high levels of planning and government involvement in the economy (eg. China) Government involvement is deemed essential, since there are some dangers that will exist if the free market is left to operate without interference. Mixed economies

Countries that have been moving towards a more market- oriented balance in their economic systems. Examples of countries that are in transition: Hungary, Poland and Russia Transition economies

Free market economy - disadvantages Demerit goods (things that are bad for people, such as drugs or child prostitution) will be over-provided, driven by high prices and thus a high profit motive. Merit goods (things that are good for people, such as education or healthcare) will be underprovided, since they will only be produced for those who can afford them and not for all.

Resources may be used up too quickly and the environment may be damaged by pollution, as firms seek to make high profits and to minimise costs. Some members of society will not be able to look after themselves, such as orphans, the sick, and the long-term unemployed, and will not survive. Large firms may grow and dominate industries, leading to high prices, a loss of efficiency, and excessive power. Free market economy - disadvantages

Because there is no price system in operation, resources will not be used efficiently. Arbitrary decisions will not be able to make the best use of resources. Planned economy - disadvantages Total production, investment, trade, and consumption, even in a small economy, are too complicated to plan efficiently and there will be misallocation of resources, shortages, and surpluses.

Governments may not share the same aims as the majority of the population and yet, by power, may implement plans that are not popular, or are even corrupt. Incentives tend to be distorted. Workers with guaranteed employment and managers who gain no share of profits are difficult to motivate. Output and/or quality will suffer. The dominance of the government may lead to a loss of personal liberty and freedom of choice. Planned economy - disadvantages

Shortages that first affected the dining table have now made their way into the bedroom. Shortages of basic products such as corn, milk and chicken have plagued Venezuela for years. President Nicolas Maduro announced in June his government was building a condom factory to supply the domestic market. The factory was built, but pharmacy managers say quality has not been what their customers demand. Production levels are not meeting domestic demand either. HIV infection rate is 0.6% …public health experts worry the scarcity of contraception methods might have long-term consequences. Fifth highest teen pregnancy rate in Latin America. condoms-shortage/