DARTUTORS
Revision Material
1. Basic economic problem: choice and the allocation of resources
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economic problem
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factors of production
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opportunity cost
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resource allocation
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choice
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production possibility curves.
Learning Objective
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define the nature of the economic problem (finite resources and unlimited wants)
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define the factors of production (land, labour, capital, enterprise)
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define opportunity cost and analyse particular circumstances to illustrate the concept
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demonstrate how production possibility curves can be used to illustrate choice and resource allocation
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evaluate the implications of particular courses of action in terms of opportunity cost.
Key terms
The basic economic problem is how to allocate scarce resources to satisfy unlimited needs and wants.
The chain of production describes how businesses from the primary, secondary and tertiary sectors work interdependently to make a product and sell it to the final customer.
Economic agents are households(private individuals in society), firms that operate in the private sector of an economy and the government (the public sector of an economy).
Economic goods are those which are limited in supply.
Free goods are goods that are unlimited in supply, such as air or seawater.
Goods are physical items such as tables, cars, toothpaste, and pencils.
interdependence means that the three sectors of industry are dependent upon each other and cannot operate independently to produce goods and services.
Needs are goods that are essential for survival.
Opportunity cost is the cost of the next best opportunity foregone when making a decision.
The production possibility curve (PPC) represents the maximum amount of goods and services which can be produced in an economy, i.e. the productive capacity of the economy.
Services are not-physical items such as haircuts, bus journeys, telephone calls, and internet Wants are goods and services that are not necessary for survival but are demanded by economic agents.
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Factors of Production;
Definition: inputs that are used in the production of goods or services in an attempt to make an economic profit. The factors of production include.
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1. Land refers to the resources available including the seas and rivers, forests and deserts all manner of minerals from the ground; chemicals from the air and earth’s crust
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2. Labor refers to the physical and mental effort produced by people to make goods/services. The size and ability of an economy’s labor force are very important in determining the quantity and quality of the goods/services produced. The greater the number of workers the better educated and skilled they are, the more an economy can produce.
3. Enterprise refers to the ability to run a production process, employ and organize resources in a firm (an organization that owns a factory or a number of factories and even shops, where goods/services are produced).
4. Capital refers to already-produced durable goods that are used in the production of goods or services. It is not wanted for itself but for its ability to help in producing other goods. It is also known as man-made resources.
Division of labor/Specialization
Definition: A system whereby workers concentrate on performing a few tasks (instead of finishing the entire product by themselves) and then exchange their production for other goods/services
Advantages
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1. More goods/services can be produced When workers become specialists in the jobs they do, repetition of the same operation increases the skill and speed of the worker and as a result, more is produced.
2. Full use is made of everyone’s abilities With the division of labor there is a greater chance that people will be able to do those things at which they are best and which interests them the most.
3. Time is saved Time is wasted when a worker has to switch from one task to another. Time can also be saved when training people. It would take many years to train someone to be able to build a car, for example, but a person can be trained quickly to fulfill one operation in the production process.
4. It allows the use of machinery As labor is divided up into specialist tasks, it becomes worthwhile to use machinery which allows a further saving in time and effort. For example, cars are painted by machines instead of by hand. This, in turn, allows machinery to take over people’s jobs leaving many unemployed.
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Disadvantages
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1. Work may become boring A worker who performs the same operation every day is likely to be unsatisfied/low morale. To combat this, many firms play music to their labor forces, or allow them to have a rest during part of each hour. Longer rest hours and annual holidays may also be introduced although this will shorten the working week.
2. People become too dependent on each other Specialisation and division of labor means that people come to rely on others for the provision of goods/services. For example, people who produce food rely on the provision of tractors, fertilizers, etc.
3. Workers may feel alienated Workers may feel unimportant because they can no longer see the final result of their efforts. Some firms are trying to reverse this by introducing workers to a greater variety of tasks
4. Standardization of goods Goods produced under a system of specialization is usually turned out in vast numbers and share the same design. Whether this is a disadvantage depends on people’s opinions
