1.

The Basic Economic

Problem
1.1 Nature of the Basic Economic Problem
• Definition and examples of the economic problem in the contexts of:
consumers; workers; producers; and governments.
• The difference between economic goods and free goods.

1.2 Factors of Production

• Definitions and examples of land, labour, capital and enterprise.
Examples of the nature of each factor of production.
• The influences on the mobility of the various factors.
• The causes of changes in the quantity and quality of the various factors.

1.3 Opportunity Cost

• Definition and examples of opportunity cost in different contexts.
• Decisions made by consumers, workers, producers and governments
when allocating their resources.

1.4 Production Possibility Curves

• Definition, drawing and interpretation of appropriate diagrams.
• The significance of the location of production points.
• Movements along a PPC and opportunity cost.
• The causes and consequences of shifts in a PPC in terms of an
economy’s growth.
1.1. Nature of the Basic Economic Problem

Learning Outcomes:

• Definition and examples of the economic problem in the contexts of: consumers; workers;
producers; and governments.
• The difference between economic goods and free goods.

1.1.1 NATURE OF THE ECONOMIC PROBLEM

Human beings have unlimited needs and wants for various goods and services.

• A good is a tangible product that humans consume or pay to acquire (e.g. fruits, clothes,
bread, books, etc.).
• A service is an intangible product, but people still need to pay for it (e.g. cleaning, lodging,
transportation, healthcare, education, etc.).
However, there is not enough resources on this planet to satisfy everybody’s needs and wants,
especially if they outgrow the supply of resources. In other words, resources are scarce (it is finite and
will eventually run out). This is known as the basic economic problem, scarcity.
Therefore, we need to choose how to allocate the limited supply of resources amongst our population
in order to satisfy their unlimited demands. Choice is necessary as scarce resources have many
alternative uses.

In summary, the basic economic problem (scarcity) is:

1. People have unlimited wants and needs.
2. Resources are limited (scarce).
3. Choices need to be made on what goods/services to produce.
4. Scarce resources have alternative uses, which leads to opportunity cost.

Figure 1.1.1: Basic Economic Problem

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Because of scarcity, everyone including consumers like you, workers, producers, and governments
have to make choices.
Individual Example
Consumer e.g. A consumer wants to buy both a PS4
and a Nintendo Switch but only has enough
money to buy one of them.

Worker e.g. A worker wants to earn more money by

working more than one job but only has
time for one.

Producer e.g. An electronics manufacturer wants to

produce both laptops and smartphones but
only have available equipment to produce
one of them.

Government e.g. A government wants to improve public

education and national security but only
has enough budget for one option.

Exercise 1.1.1: Basic Economic Problem Examples

Give a real-life example of the basic economic problem experienced by each of the following individuals. Try
not to use the examples that have already been given to you.
1. Consumer
_____________________________________________________________________________________
_____________________________________________________________________________________
2. Worker
_____________________________________________________________________________________
_____________________________________________________________________________________
3. Producer
_____________________________________________________________________________________
_____________________________________________________________________________________
4. Government
_____________________________________________________________________________________
_____________________________________________________________________________________

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Exercise 1.1.2: Understanding Surge

Read the article about surge pricing at Uber below. Then answer the questions that follow.
What is surge?
During times of high demand for rides, fares may increase to make sure those who need a ride can get one.
For riders, surge helps ensure that pickup is available quickly and reliably. For drivers, surge means higher
fares and a steady stream of ride requests. When drivers are online, their app displays areas with high
demand for rides in shades of red. The deeper the shade of red, the greater that area's demand.
Surge pricing for any trip is based on the rider's pickup location. While the driver may receive a ride request
while his/her vehicle is in a surging area, the rider's pickup location may not be surging. When they receive a
pickup request from a surging area, the trip request screen displays the surge multiplier.
Surge rates are charged as a multiplier of X.X. For example, a rider in a surging area may see and accept a
surge multiplier of 1.3x or 2.1x. This surge multiplier applies to the base, time, and distance of the trip fare.
Cancellation fees, tolls, and per-trip surcharges are not subject to surge pricing.
Here's an example of what you would earn for a $10 trip fare with a surge rate of 1.5x:
$2 base
$3 distance
$5 time
SUBTOTAL: $10
Surge multiplier of 1.5x = $5
Toll: $1.00
Gross fare: $16 ($10 + $5 + $1 toll)

Your net payout for this trip would be $15 - the Uber service fee + $1.00 toll.
Payment statements display the surge amount separately.

1. When Uber initiates surge pricing, what is the need that can’t be satisfied?
__________________________________________________________________________________
__________________________________________________________________________________
2. What is Uber’s solution to the problem?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
3. Describe the choices that the following groups face as a result of the surge pricing:
• Uber Drivers ____________________________________________________________________
• Uber Riders ____________________________________________________________________

4. Think of other ways that Uber could solve the problem and write them down.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

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1.1.2 ECONOMIC GOODS AND FREE GOODS
In Economics, goods are produced from a finite supply of resources and therefore producing these
goods leads to opportunity cost as resources could have been used to produce something else.
These goods are known as economic goods. Almost everything we consume is classified as an
economic good as long as they are made from scarce resources.
By contrast, a free good is a good that has an infinite supply of available and therefore has zero
opportunity cost. A common example of a free good is sunlight.

Economic Good Free Good

• Made from scarce resources • Unlimited supply
• Involves opportunity cost • Zero opportunity cost
• Requires human effort to obtain • Needs no conscious effort to obtain

However, it is important to note that goods at zero price are not classified as free goods. For
instance, a shop is giving away free samples of a shampoo for promotion. That free sample would
not be a free good because the shampoo was made from scarce resources.

Exercise 1.1.3: Economic or Free?

1. For each of the following goods, determine whether they are economic or free.

Seawater

Freshwater

Computer programme

Cotton t-shirts

Air

2. List as many examples of free goods as you can.

_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________

3. For the free goods above, explain why they are classified as free goods rather than economic goods.

_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________

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 Master Your Definitions
Good: a tangible product that humans consume or pay to acquire (e.g. fruits, clothes, bread, books).
Service: an intangible product, but people still need to pay for it (e.g. cleaning, lodging, transportation,
healthcare, education).
Scarce: finite and will eventually run out.
Production: the process of using resources to make and sell goods and services to satisfy our demands.
Economic goods: goods that are produced from a finite supply of resources and therefore involves
opportunity cost. These goods require human effort to obtain.
Free goods: goods that have an infinite supply available and therefore producing it leads to no opportunity
cost. These goods requires no conscious human effort to obtain.