TOPIC 2: BASIC ECONOMIC PROBLEMS

Problems that all economies try to solve regarding the basic processes of production, consumption and
exchange, highlighting the promotion or violation of human rights and the environment.

Basic economic problem:

Needs of people are unlimited Means to satisfy needs are limited

(Insatiable)

It creates a big problem

It is the problem of SCARCITY
SCARCITY is the CENTRAL economic problem.
Economics try to solve the problem of scarcity.

Scarcity, Choice and Opportunity cost:

Scarcity:
Scarcity is the central economic problem.
It exists due to the unlimited needs of humans and the limited resources.
Scarcity forces us to choose between alternatives and make choices

OR
It is resources which are difficult to find or are in short supply.

Alternatives:
Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.
The most desirable alternative given up because of a decision is known as opportunity cost.

Choice:

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Choice is a result of scarcity
Choice means that one alternative is selected over another.

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Opportunity cost:
Scarcity caused people to make choices so that they can satisfy their needs
Consumers place their needs in order of importance: Important needs are satisfied first and less important
needs are satisfied last.
It will become necessary to sacrifice certain goods or services for other goods and services.

Opportunity cost is the value of the best alternative that could have been chosen but was not chosen.

OR
Opportunity cost is the value of the best forgone opportunity.

The sacrifice you make is known as OPPORTUNITY COST.

The scarcity problem:

Absolute scarcity:
Absolute scarcity is the inability of nature to provide the necessary resources to satisfy our daily needs.
E.g. a drought may limit the supply of agricultural produce.
A lack of food may lead to starvation.

Relative scarcity:
Relative scarcity occurs when goods and services are available, but you do not have the resources to acquire
it.
E.g. you want to buy Levi jeans but you do not have enough money to purchase it.

Difference between Economic goods and Free goods:

Free goods:
Is freely available in unlimited quantities, sea sand, sun light.
Does not command a price because nobody wants to pay a price for it.
Has value in use but no exchange value.
The owner does not benefit from it.
It is not controlled by human beings.
The possession and use of free goods do not indicate wealth or prosperity.

Economic goods:
Are available in limited quantities, often insufficient to meet needs, e.g. coal, petrol, electricity
Command a price – Consumer must pay for it.
It has both value in use and exchange value.
The owner benefits from it.
It is controlled by human beings.
The possession and use of economic goods indicate wealth and prosperity.

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The basic processes:

Production:
Production is the process to change resources (inputs) into goods and services (outputs) which are bought by
consumers, governments and businesses to satisfy their needs and wants.

The production process:

Inputs: raw materials, labour and capital

Processing: factory or bakery

Outputs: the final product - bread

Classification of Production:

Production of goods and services occurs in THREE sectors: Primary sector, Secondary sector and Tertiary
sector.

Primary Sector:
The primary sector is the sector where raw materials such as agricultural, fishing, forestry and mining products
are produced.
Natural resources are extracted, collected and cultivated as raw materials.

Secondary Sector:
The secondary sector is the manufacturing part of the economy in which raw materials and other inputs are
used to produce other goods and services.
The secondary sector produce:
1. Intermediate goods: minerals are processed into steel, gold ore is produced into gold, etc.
2. Consumer goods: clothing, footwear, furniture, etc.
3. Capital goods: machinery, buildings, etc.

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Tertiary Sector:
The tertiary sector consists of the service and trade section of the economy.
It is also known as the service sector
Services in the tertiary sector includes:
1. Transport
2. Communication
3. Education
4. Financial services
5. Personal and government services

The following FACTORS OF PRODUCTION are used as inputs in the production process:

Natural Resources:
Natural resources are free gifts from nature.
E.g. It include Minerals, Raw materials, Land, Water, etc.

Labour:
Labour is all human effort, mentally and /or physically, provided by people to earn remuneration.
E.g. Skilled labour, Semi-skilled labour, Unskilled labour.

Capital:
Capital is man-made resources that are used to produce more goods and services.
Capital makes the production process easier. E.g. Buildings, Machines, Tools, Vehicles, ships, etc.

Entrepreneurship:
The entrepreneur is the person who takes the initiative to start the business, organize its production and take
risks.
OR
It is the person who manages, organizes and coordinates natural resources, capital and labour.

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Goods:

Goods are tangible objects like food, clothes, houses, books, shoes, etc.

Services:
Services are intangible things like medical services, legal services, financial services

Large scale production takes place in a factory where large amounts of goods can be produced.
The goods are identical.

Small scale production is called Micro, medium size business that employs a small number of workers and
does not have a high volume of sales.

Formal sector:
The formal sector is businesses which are legally registered, and their production is recorded in GDP figures of
the country.
Jobs with normal hours and regular wages.
Businesses pay tax on their profits to the government.
They must be involved with legal activities.

Informal sector:
The informal sector is businesses which are not legally registered and their production is not recorded in the
GDP figures of the country.
Do not recognise the normal working hours.
Do not pay taxes on their profits to the government.
Informal sector includes the illegal activities.

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Public goods:
Public goods are goods that are used by the community or society.
E.g. traffic light,

Private goods:
Private goods are goods that are consumed by individuals or households.
e.g. consumer goods.

Capital intensive production:

Capital intensive production is when man-made (capital equipment and machines) are predominantly used in
the production process and relatively few workers are employed.
Bad for South Africa because it can lead to more unemployment.

Labour intensive production:

Labour intensive is when manual labour is predominantly used in the production process and less machinery is
used.
Good for South Africa because it will generate more employment.

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Specialisation:
Specialisation occurs when people, businesses and countries concentrate on different activities to which they
are best suited. E.g.
Some people specialise in teaching others in medicine, etc.
Some businesses produce clothes, other businesses produce food, etc.
Some countries specialise in the manufacturing of minerals, others rice farming, and Japan produces
electronic goods and sells these at a lower price.

Division of labour:
Division of labour occurs when the production process is broken up into different steps or parts, and each step
or part is performed by an individual worker or a group of workers.

Consumer goods:

Consumer goods are goods that are used or consumed by individuals or households to satisfy their needs
E.g. furniture, food, household appliances, etc.

Capital goods:
Capital goods are goods that cannot be consumed but are used in the production of other goods.
E.g. machinery, equipment, tools, school buildings, etc.

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Intermediate goods:
Intermediate goods are goods that are purchased to be used as inputs in producing other goods.
Intermediate goods are processed further before they are sold to end users.
E.g. car manufacturer.

Final goods:
Final goods are goods that are ready for sale to be used or consumed by households, individuals and firms.
E.g. a loaf of bread.

There are THREE QUESTIONS that must be solved in ALL economic systems:
1. What goods or services will be produced?
2. How will goods and services be produced?
3. For whom will the goods and services be produced?
The way a country will answer these questions determines what kind of economic system it will have, e.g.
Traditional system; Command (Centrally planned economy); Market economy; Mixed economic system.
Exchange:
Exchange is the process of trade (selling and buying) that takes place when goods and services are traded for
money.

Describe the term Market:

A market exists in any place or under any circumstances where buyers and sellers make contact, with the aim
of exchanging information about the buying and selling of goods and services and to determine the quantities
that will be bought and sold.
OR
A market is an institution or mechanism that brings the buyers and sellers of a good or a service together.
OR
A market is a place where buyer and sellers exchange goods and services.

The activities that happen in markets:

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Buyers and sellers exchange information.
Price and quantities are determined.
The amounts of goods and services that will be bought or sold are determined.

The role of money:

Money is used as a medium of exchange.
Money is standardised and everybody will accept it in exchange for goods and services.
Money is an easy and convenient way for exchanging goods and services.
Money also makes specialisation possible.

Bartering:
Bartering is a system where goods and services are exchanged for other goods and services.
Bartering is a problem; it is difficult to find trading partners and agreeing on the exchange value at which one
good can be exchanged for another good.

Example of the difficulty of bartering:

Consumption:
Consumption is the act of using or consuming goods and services.

Consumers:
Consumers are members of households who consume or use the goods and services to satisfy their needs
and wants.

Consumption by different participants in the economy:

Consumption by households: Occurs when individuals and households buy goods and services to satisfy their
needs and wants.
Spending by households is indicated with the abbreviation C.

Consumption by businesses: Occurs when business enterprises buy raw materials to be used in the production
process.
When businesses buy capital goods it is called Investments, e.g. when they buy machinery, tools, buildings,
etc.
Spending by businesses is indicate with the abbreviation I.

Consumption by the government: Occurs when the government uses the money they receive, to finance
services that are in the interest of the public.
Spending by the government is indicated with the abbreviation G.

The different categories of consumption:

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Consumer goods are classified in:

Non-durable goods:
These are goods that can only be used once because they are consumed or destroyed in the process of
being used.
E.g. food, petrol, medicine, etc.

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Semi-durable goods:
These are goods that last and can be used over and over for a limited period then they must be replaced.
E.g. furniture, clothing, motorcar tyres, etc.

Durable goods:
These are goods that can be used over and over for many years.
E.g. furniture, household appliances, motorcars, etc.

Services:
Households and individuals use services to satisfy their needs and wants.
E.g. they rent houses, use domestic services, they use medical services, they use transport services (taxi’s),
etc.

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Promotion of human rights and the environment:

Human rights:
Promotion of Human rights:
Human rights in South Africa are protected by the South African Constitution (1996).
The Constitution of South Africa is the supreme law and everyone in South Africa, including the government,
and all laws, are subject to and must follow the Constitution.
The Constitution contains the Bill of Rights which protects the basic rights of the people of South Africa.

What is a human right?

Human rights are rights that everyone must enjoy, by the mere fact that they are human beings.
These rights are unchallengeable, which means that it cannot be taken away from you except in specific
situations, e.g. your right to freedom is taken away from you when you are found guilty of a crime and must go
to jail.

Human rights include:

Political rights, for instance the right of all adults to vote in free elections and to belong to any political party.
Civil rights, which include the right to be treated fairly and equally and to freedom of speech.
Economic rights, such as the right to work and to own fixed property.

The Bill of rights:

The Bill of Rights is a cornerstone of democracy in South Africa.
It protects the rights of all people in our country and affirms the democratic values of human dignity, equality
and freedom.
The state must respect, protect, promote and fulfil the rights in the Bill of Rights.

The Bill of Rights in the South African Constitution includes socio-economic rights which protect our right of
access to:
land
adequate housing
healthcare services
sufficient food and water
social security and social assistance

The constitution gives the following rights with regards to businesses and "employment:"
every citizen has the right to choose their trade, occupation or profession freely
everyone has the right to fair labour practices
every worker has the right to form and join a trade union
every employer has the right to form and join an employers' organisation

The environment:
The natural environment includes all living and non-living things that occur naturally on the earth.
In South Africa, the natural environment is protected by the Constitution.

The Bill of Rights guarantees the following environmental rights:

Everyone has the right:

a. to an environment that is not harmful to their health or well-being; and

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b. to have the environment protected, for the benefit of present and future generations, through reasonable
legislative and other measures that:
prevents pollution and ecological degradation.
promote conservation; and
secure ecologically sustainable development and use of natural resources while promoting justifiable
economic and social development.

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