The economic problem is a basic principle that forms the basis of all economic studies as it is a central issue that is faced by all of society. It refers to the issue of scarcity, as there is not enough resources available to produce all goods and services required to satisfy needs and wants of all people.
Scarcity is caused by the economic problem. It is a term used to describe the relationship between people and their unlimited needs and wants that cannot be satisfied by limited resources. If resources become scarce, they can become rare and expensive.
Want your ATAR notes to empower over 77,000 students per year?
Join the Team.
Sign Up for Free to Read More
Get instant access to all content and subscribe to our weekly email list on study tips, opportunities and other free resources.
It only takes a minute...
In order to address and solve both the economic problem and the issue regarding scarcity, firms need to answer the following economic questions 1. What products to produce? 2. How much to produce? 3. Who to produce the products for? Who will consume the products? 4. What resources will be used in the production of these products
Opportunity cost is defined as the value of alternative sacrificed when a choice or decision is made. Put simply, when resources are limited or scare, then decisions must be made to decide what goods or services we can have with the limited resources. For instance, if you have $100 and you REALLY need some new shoes and they cost $90, but you also REALLY want a new watch that costs $95. With the money that you have, you must chose either the shoes or the watch: if you chose the shoes then the $95 watch is now the opportunity cost as you had to sacrifice it. This transaction can be known as a trade-off. However, if you had $200, then there is no opportunity cost (no sacrificed good) and the product is described as a free good. It is important to remember, that due to relative scarcity, the value of the best option surrendered (also known as the value of the trade-off) is the actual cost of an economic choice.
Factors of Production
The four factors of production are types of resources in the form of human, natural and capital resources. LAND: This is a type of natural resource that depicts the things used in production that come directly for the Earth. For example, a mining site's 'land resources' include the geographical location of the firm or the iron ore deposits. LABOUR: The human resource of labour refers to the physical or mental exertion by workers during production. ENTERPRISE: This is another type of human resource as it included the human management, thought processes and entrepreneurship of workers and owners. CAPITAL: This resource includes the man-made machinery, tools or equipment used to produce goods or services.