1.1.3

The Economic Problem

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The Economic Problem

The basic economic problem is that there are not enough resources to satisfy humans' consumption demands and desires.

Wants and needs

Wants and needs

Consumers have needs and wants that people hope will be satisfied.
- Needs - things people can't live without (e.g. water).
- Wants - things people can live without but desire (e.g. smartphones).
This is achieved by economic activity and the production of goods and services.

Allocating scarce resources

Allocating scarce resources

There are scarce resources in society. Because of this, choices have to be made on how to use these resources.
The foundation of economic decisions are:
- What goods/services we produce?
- How we produce those goods/services?
- Who we produce those goods/services for?

Basic economic problem

Basic economic problem

There are not enough resources on earth to satisfy humans' unlimited wants and needs.
The basic economic problem involves working out how to allocate limited resources as effectively as possible to satisfy people's unlimited wants and needs.

Opportunity Cost

The cost of one item can be seen as the lost opportunity to consume something else. Economists call this the opportunity cost. The opportunity cost is defined as the 'next best alternative foregone'.

Tradeoffs

Tradeoffs

People face a tradeoff when they make choices.
If you choose to buy a video game, you cannot spend that income on movies.
The opportunity cost is the 'next best alternative foregone' - what you would use the money from the video game to buy instead.

Opportunity cost as a price

Opportunity cost as a price

You can sometimes refer to the opportunity cost as a price.
If you buy a new bike for £300, then £300 measures the amount of consumption you have given up.

Opportunity cost as money and time

Opportunity cost as money and time

In some cases, opportunity cost exceeds the monetary cost.
For example, attending university.
As well as the financial cost of tuition, you are giving up time that could be spent earning money at a paying job.
So the total opportunity cost is greater than the financial cost of university because of the lost potential earnings.

Uses of opportunity cost

Uses of opportunity cost

Opportunity cost is a useful concept when thinking about allocating resources.
- E.g. consumers use it to decide how to spend their earnings.

Issues with opportunity cost

Issues with opportunity cost

Not all factors have alternatives.
Some alternatives are unknown.
Agents may lack information on alternatives.
It can be difficult to switch some factors to another use.

1

Introduction to Markets

2

Market Failure

2.1

Market Failure

2.1.1Types of Market Failure 2.1.2Externalities 2.1.3The Deadweight Welfare Loss of Externalities 2.1.4A-A* (AO3/4) - The Externalities of Education 2.1.5Public Goods 2.1.6Information Gaps 2.1.7End of Topic Test - Market Failure 2.1.8Application Questions - Market Failure

2.2

Government Intervention

2.2.1Government Intervention in Markets 2.2.2Subsidies & Price Controls 2.2.3Pollution Permits & Regulation 2.2.4A-A* (AO3/4) - European Emissions Trading 2.2.5State Provision & Information Provision 2.2.6Government Failure 2.2.7End of Topic Test - Government Intervention 2.2.8A-A* (AO3/4) - Government Intervention

3

The UK Macroeconomy

3.1

Measures of Economic Performance

3.1.1Measuring Economic Growth 3.1.2National Income Data 3.1.3Inflation 3.1.4Causes of Inflation 3.1.5Consequences of Inflation 3.1.6Employment & Unemployment 3.1.7Causes & Impact of Unemployment 3.1.8A-A* (AO3/4) - Hysteresis 3.1.9Balance of Payments 3.1.10Current Account Deficit & Imbalances 3.1.11End of Topic Test - Economic Performance 3.1.12Application Questions Macroeconomy

3.2

Aggregate Demand

3.2.1Aggregate Demand 3.2.2Consumption 3.2.3Investment 3.2.4Government Expenditure 3.2.5Net Trade 3.2.6End of Topic Test - Aggregated Demand 3.2.7Application Questions - AD

3.3

Aggregate Supply

3.3.1Aggregate Supply 3.3.2End of Topic Test - Aggregated Supply 3.3.3A-A* (AO3/4) -Aggregate Supply

3.4

National Income

3.4.1National Income 3.4.2Injections & Withdrawals 3.4.3Equilibrium Level of Real National Output 3.4.4Multiplier Effect 3.4.5End of Topic Test - National Income 3.4.6Application Questions - National Income

3.5

Economic Growth

3.5.1Causes of Economic Growth 3.5.2Output Gaps 3.5.3Business Cycle 3.5.4Impact of Economic Growth 3.5.5End of Topic Test - Economic Growth 3.5.6A-A* (AO3/4) - Growth

4

The UK Economy - Policies

4.1

Macroeconomic Objectives & Policies

4.1.1Possible Objectives 4.1.2Demand-Side Policies - Monetary 4.1.3Demand-Side Policies - Monetary 2 4.1.4A-A* (AO3/4) - The Future of Interest Rates 4.1.5Demand-Side Policies - Fiscal 4.1.6Demand-Side Policies in 2007-08 4.1.7Strengths & Weaknesses of Demand Side 4.1.8Supply-Side Policies 4.1.9Supply-Side Policies 2 4.1.10Conflicts Between Objectives 4.1.11A-A* (AO3/4) - Conflicting Incentives 4.1.12Phillips Curve 4.1.13End of Topic Topic - Policies & Objectives 4.1.14Application Questions - UK Policies

5

Business Behaviour

5.1

Business Growth

5.1.1Size & Types of Firms 5.1.2Business Growth 5.1.3Pros & Cons of External Expansion 5.1.4Demergers 5.1.5End of Topic Test - Business Growth 5.1.6A-A* (AO3/4) - Business Growth

5.2

Business Objectives

5.2.1Business Objectives 5.2.2End of Topic Test - Business Objectives 5.2.3Application Questions - Business Objectives

5.3

Revenues, Costs & Profits

5.3.1Revenue 5.3.2Costs 5.3.3Economies & Diseconomies of Scale 5.3.4Profits 5.3.5Profits 2 5.3.6End of Topic Test - Revenue, Costs & Profits 5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6

Market Structures

6.1

Market Structures

6.1.1Efficiency 6.1.2Perfect Competition 6.1.3Perfect Competition 2 6.1.4Monopolistic Competition 6.1.5Oligopolies 6.1.6The Prisoner's Dilemma 6.1.7Collusion in Oligopolistic Markets 6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?6.1.9Monopolies 6.1.10Price Discrimination 6.1.11Monopsony 6.1.12A-A* (AO3/4) - Models in Economics 6.1.13Contestability 6.1.14Benefits of Contestability 6.1.15End of Topic Test - Market Structures 6.1.16Application Questions - Market Structures 6.1.17A-A* (AO3/4) - Cereal Collusion

6.2

Labour Market

6.2.1Demand for Labour 6.2.2Supply of Labour 6.2.3Labour Market Imperfections 6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment 6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?6.2.6Wage Determination 6.2.7Elasticity of Labour Supply & Demand 6.2.8Intervention in Setting Wages 6.2.9End of Topic Test - Labour Market 6.2.10A-A* (AO3/4) - Labour Markets

6.3

Government Intervention

6.3.1Reasons for Government Intervention 6.3.2Government Promotion of Competition 6.3.3Usefulness of Competition Policy & Examples 6.3.4A-A* (AO3/4) - Modern Competition Policy 6.3.5Privatisation 6.3.6Government Regulation 6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation 6.3.8Government Protection of Suppliers and Employees 6.3.9Impact of Government Intervention 6.3.10End of Topic Test - Government Intervention 6.3.11Application Questions - Government Intervention

7

A Global Perspective

8

Finance & Inequality

8.1

Poverty & Inequality

8.1.1Absolute & Relative Poverty 8.1.2Inequality 8.1.3Inequality 2 8.1.4Lorenz Curve 8.1.5Government Policy on Poverty 8.1.6End of Topic Test - Poverty & Inequality 8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2

Emerging & Developing Economies

8.2.1Measures of Development 8.2.2Factors Influencing Growth & Development 8.2.3Barriers to Development 8.2.4Barriers to Development 2 8.2.5A-A* (AO3/4) - The Bottom Billion 8.2.6Development Strategies 8.2.7Interventionist Strategies 8.2.8Aid 8.2.9International Institutions 8.2.10International Institutions 2 8.2.11End of Topic Test - Emerging & Developing 8.2.12Application Questions - Developing Countries

8.3

The Financial Sector

8.3.1Role of Financial Markets 8.3.2Market Failure in the Financial Sector 8.3.3Role of Central Banks 8.3.4End of Topic Test - The Financial Sector 8.3.5A-A* (AO3/4) - Financial Sector

8.4

Role of the State in the Macroeconomy

8.4.1Public Expenditure 8.4.2Taxation 8.4.3Public Sector Finances 8.4.4End of Topic Test - Role of the State 8.4.5Application Questions - Role of the State

9

Examples of Global Policy

9.1

International Policies

9.1.1Global Debt & Deficit Policies 9.1.2Poverty & Inequality Policies 9.1.3Changes in Interest Rates 9.1.4Competitiveness Policies 9.1.5End of Topic Test - International Policies 9.1.6A-A* (AO3/4) - International Policies

9.2

Policy Responses to Shocks

9.2.1International Tax Policies 9.2.2Problems for Policymakers 9.2.3End of Topic Test - Policy Responses 9.2.4Application Questions - Policy Responses

Jump to other topics

1

Introduction to Markets

2

Market Failure

2.1

Market Failure

2.1.1Types of Market Failure 2.1.2Externalities 2.1.3The Deadweight Welfare Loss of Externalities 2.1.4A-A* (AO3/4) - The Externalities of Education 2.1.5Public Goods 2.1.6Information Gaps 2.1.7End of Topic Test - Market Failure 2.1.8Application Questions - Market Failure

2.2

Government Intervention

2.2.1Government Intervention in Markets 2.2.2Subsidies & Price Controls 2.2.3Pollution Permits & Regulation 2.2.4A-A* (AO3/4) - European Emissions Trading 2.2.5State Provision & Information Provision 2.2.6Government Failure 2.2.7End of Topic Test - Government Intervention 2.2.8A-A* (AO3/4) - Government Intervention

3

The UK Macroeconomy

3.1

Measures of Economic Performance

3.1.1Measuring Economic Growth 3.1.2National Income Data 3.1.3Inflation 3.1.4Causes of Inflation 3.1.5Consequences of Inflation 3.1.6Employment & Unemployment 3.1.7Causes & Impact of Unemployment 3.1.8A-A* (AO3/4) - Hysteresis 3.1.9Balance of Payments 3.1.10Current Account Deficit & Imbalances 3.1.11End of Topic Test - Economic Performance 3.1.12Application Questions Macroeconomy

3.2

Aggregate Demand

3.2.1Aggregate Demand 3.2.2Consumption 3.2.3Investment 3.2.4Government Expenditure 3.2.5Net Trade 3.2.6End of Topic Test - Aggregated Demand 3.2.7Application Questions - AD

3.3

Aggregate Supply

3.3.1Aggregate Supply 3.3.2End of Topic Test - Aggregated Supply 3.3.3A-A* (AO3/4) -Aggregate Supply

3.4

National Income

3.4.1National Income 3.4.2Injections & Withdrawals 3.4.3Equilibrium Level of Real National Output 3.4.4Multiplier Effect 3.4.5End of Topic Test - National Income 3.4.6Application Questions - National Income

3.5

Economic Growth

3.5.1Causes of Economic Growth 3.5.2Output Gaps 3.5.3Business Cycle 3.5.4Impact of Economic Growth 3.5.5End of Topic Test - Economic Growth 3.5.6A-A* (AO3/4) - Growth

4

The UK Economy - Policies

4.1

Macroeconomic Objectives & Policies

4.1.1Possible Objectives 4.1.2Demand-Side Policies - Monetary 4.1.3Demand-Side Policies - Monetary 2 4.1.4A-A* (AO3/4) - The Future of Interest Rates 4.1.5Demand-Side Policies - Fiscal 4.1.6Demand-Side Policies in 2007-08 4.1.7Strengths & Weaknesses of Demand Side 4.1.8Supply-Side Policies 4.1.9Supply-Side Policies 2 4.1.10Conflicts Between Objectives 4.1.11A-A* (AO3/4) - Conflicting Incentives 4.1.12Phillips Curve 4.1.13End of Topic Topic - Policies & Objectives 4.1.14Application Questions - UK Policies

5

Business Behaviour

5.1

Business Growth

5.1.1Size & Types of Firms 5.1.2Business Growth 5.1.3Pros & Cons of External Expansion 5.1.4Demergers 5.1.5End of Topic Test - Business Growth 5.1.6A-A* (AO3/4) - Business Growth

5.2

Business Objectives

5.2.1Business Objectives 5.2.2End of Topic Test - Business Objectives 5.2.3Application Questions - Business Objectives

5.3

Revenues, Costs & Profits

5.3.1Revenue 5.3.2Costs 5.3.3Economies & Diseconomies of Scale 5.3.4Profits 5.3.5Profits 2 5.3.6End of Topic Test - Revenue, Costs & Profits 5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6

Market Structures

6.1

Market Structures

6.1.1Efficiency 6.1.2Perfect Competition 6.1.3Perfect Competition 2 6.1.4Monopolistic Competition 6.1.5Oligopolies 6.1.6The Prisoner's Dilemma 6.1.7Collusion in Oligopolistic Markets 6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?6.1.9Monopolies 6.1.10Price Discrimination 6.1.11Monopsony 6.1.12A-A* (AO3/4) - Models in Economics 6.1.13Contestability 6.1.14Benefits of Contestability 6.1.15End of Topic Test - Market Structures 6.1.16Application Questions - Market Structures 6.1.17A-A* (AO3/4) - Cereal Collusion

6.2

Labour Market

6.2.1Demand for Labour 6.2.2Supply of Labour 6.2.3Labour Market Imperfections 6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment 6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?6.2.6Wage Determination 6.2.7Elasticity of Labour Supply & Demand 6.2.8Intervention in Setting Wages 6.2.9End of Topic Test - Labour Market 6.2.10A-A* (AO3/4) - Labour Markets

6.3

Government Intervention

6.3.1Reasons for Government Intervention 6.3.2Government Promotion of Competition 6.3.3Usefulness of Competition Policy & Examples 6.3.4A-A* (AO3/4) - Modern Competition Policy 6.3.5Privatisation 6.3.6Government Regulation 6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation 6.3.8Government Protection of Suppliers and Employees 6.3.9Impact of Government Intervention 6.3.10End of Topic Test - Government Intervention 6.3.11Application Questions - Government Intervention

7

A Global Perspective

8

Finance & Inequality

8.1

Poverty & Inequality

8.1.1Absolute & Relative Poverty 8.1.2Inequality 8.1.3Inequality 2 8.1.4Lorenz Curve 8.1.5Government Policy on Poverty 8.1.6End of Topic Test - Poverty & Inequality 8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2

Emerging & Developing Economies

8.2.1Measures of Development 8.2.2Factors Influencing Growth & Development 8.2.3Barriers to Development 8.2.4Barriers to Development 2 8.2.5A-A* (AO3/4) - The Bottom Billion 8.2.6Development Strategies 8.2.7Interventionist Strategies 8.2.8Aid 8.2.9International Institutions 8.2.10International Institutions 2 8.2.11End of Topic Test - Emerging & Developing 8.2.12Application Questions - Developing Countries

8.3

The Financial Sector

8.3.1Role of Financial Markets 8.3.2Market Failure in the Financial Sector 8.3.3Role of Central Banks 8.3.4End of Topic Test - The Financial Sector 8.3.5A-A* (AO3/4) - Financial Sector

8.4

Role of the State in the Macroeconomy

8.4.1Public Expenditure 8.4.2Taxation 8.4.3Public Sector Finances 8.4.4End of Topic Test - Role of the State 8.4.5Application Questions - Role of the State

9

Examples of Global Policy

9.1

International Policies

9.1.1Global Debt & Deficit Policies 9.1.2Poverty & Inequality Policies 9.1.3Changes in Interest Rates 9.1.4Competitiveness Policies 9.1.5End of Topic Test - International Policies 9.1.6A-A* (AO3/4) - International Policies

9.2

Policy Responses to Shocks

9.2.1International Tax Policies 9.2.2Problems for Policymakers 9.2.3End of Topic Test - Policy Responses 9.2.4Application Questions - Policy Responses

Practice questions on The Economic Problem

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

1
The foundation of economic decisions are:Fill in the list
2
Which of the following is an example of the fundamental economic problem in action?Multiple choice
3
Examples of needs:True / false
4
Issues with opportunity cost:Fill in the list
5
Which of these is the opportunity cost?Multiple choice

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Positive & Normative Economic Statements

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