CHAPTER 1
THE NATURE OF THE
ECONOMIC PROBLEM
NEEDS AND WANTS
RESOURCES
The factors used in producing goods or providing services. In other
words, they are the inputs that are used to create things or help
you provide services. Economic resources can be divided into
human resources, such as labor and management, and nonhuman
resources, such as land, capital goods, financial resources, and
technology.
ECONOMIC PROBLEM
Problem arises because the resources of all types are limited and
have alternative uses. If the resources were unlimited or if a
resource only had one single use, then the economic problem
would probably not arise. However, be it natural productive
resources or man-made capital/consumer goods or money or time,
scarcity of resources is the central problem.
BASIC PROBLEM OF AN
ECONOMY
#1 – What to Produce?
should we produce more guns or more butter?
#2 – How to Produce?
you can produce cotton cloth using handlooms, power looms or automatic
looms. While handlooms require more labour, automatic looms need higher
power and capital investment.
#3 – For whom to Produce?
who gets what share of the total output of goods and services produced.
#4 – What provision should be made for economic growth?
Society must decide on the part of the resources that it wants to save for
future progress.
SCARCITY OF RESOURCES
Scarcity of resource is a feature of all societies from the richest and
to the poorest. Scarcity of resources does not mean that rare and
small quantity of resources, it simply means that it is not enough to
satisfy all wants at once. That is, resources are scarce in relation to
their demand. The economic resources land, labour, material, fuel,
machinery etc which are needed to produce goods and services are
limited in supply. However over technological progresses enable us
to produce more things with a given resources. However, the
problem is that our wants increase faster than our ability to
produce goods and services.
ALLOCATION OF RESOURCES
As resources are scarce and our wants are never ending, we have
to allocate resources. When we allocate resources, we ask the
following questions.
• What goods and services should we produce?
• How should the economy use its resources to operate schools or
hospitals?
• What mix of goods will it produce?
• What is the best way to produce goods and services?
• What is the best use of scarce resources?
• Who is to receive goods and services?
KEY TERMS
Needs – something essential to survival – food, water, warmth,
clothing and shelter.
Wants – something you would like to have, but is not essential to
survival – for example cars, mobile phones and chocolate.
Resources – something used to produce output.
ECONOMIC GOOD
A commodity or service that is useful to man but that must be paid
for —usually used in plural.
An economic good is a good or service that has a benefit (utility) to
society. Also, economic goods have a degree of scarcity and
therefore an opportunity cost.
FREE GOOD
A free good is a good with zero opportunity cost. This means it can be consumed in as much quantity as needed without
reducing its availability to others.
Examples of Free Good
Air. Oxygen is something we need and we can simply breathe it in. There is no element of rivalry (e.g. if I breathe, there is still
enough air for you to breath too.)
Intellectual ideas. If you develop a new invention and don’t patent it (e.g. yoga exercises, how to tie a knot) anybody can
reuse this idea without any opportunity cost.
Web-page. If you view a web-page, it doesn’t prevent anyone else consuming the good – it is still available at no opportunity
cost.
Sunlight. Sunlight is available to all.
Unless your neighbour grows a leylandii hedge and casts your garden in shade.
Music. Once a song is composed, everyone is free to sing the tune.
DIFFERENCE BETWEEN
ECONOMIC AND FREE GOOD
ECONOMIC GOOD FREE GOOD
Demand is higher than supply and Are available and abundant in nature
availability
Requires human efforts for production Does not require human efforts to
produce
Has a money value or price Has no money value or price
Can be regarded as wealth in economics Cannot be regarded as wealth in
economics
They are not gifts of nature e.g. table, They are gifts of nature e.g. sunlight,
chair, stationery air ,water
THANK YOU
