The Basic Economic Problem

Definition: The scarcity of resources relative to human needs and wants.

Goods - tangible items that are purchased by the people or firms to satisfy their needs and wants. They are called tangible because they have a physical existence. As a result, they can be seen and touched.

Types of goods -> consumer and capital, economic and free goods

Free good: an item which we need or want that is without limit, ubiquitous.

Economic goods: goods that are limited in supply

Consumer goods: those goods that satisfy an immediate consumer need or want. They are also divided under consumer durables and non durables.

Consumer durables: those that last a long time and can be easily reused

Non durables: perishable

Capital goods: goods that do not satisfy immediate human needs or wants. They are human made resources that are used in the production of other goods and services.

The purchase of capital goods is known as an investment.

Services - refer to intangible provisions or are intangible in nature. They cannot be returned or replaced.

Needs - goods and services which are essential for living

Wants - goods and services without which one can survive. They are not essential for living, but their consumption improves the quality of living.

Production - involves using resources to make and sell different goods and services. All the resources act as inputs to productive activity and goods and services are their products or outputs. Any activity that fails to satisfy a human need or want is not a productive activity. The people who make and sell goods and services are known as producers.

Types of resources -> renewable and nonrenewable

Renewable: resources that can be replaced as they are used up in production. For example, solar energy, wind energy, hydroelectric energy

Nonrenewable: resources that cannot be replaced as they are used up in production. For example, oil, coal, copper, gas

Consumption - involves the using up of goods and services to satisfy human needs and wants

Consumption expenditure: the total amount consumers spend each period on economic goods.

Consumers: the people and organisations that buy economic goods and services to satisfy their wants.

Exchange - when consumers and producers engage in trade of goods and services

Basic economic problem examples in terms of consumers, producers, workers and governments

Consumers - new car or expensive holiday?

Worker - additional wages from overtime or use the time to go to the cinema? Producers - invest in new machinery or increase training of workers? Government - new school or new hospital?