SECTION 1 The basic economic problem 1 2 Chapter 1 The nature of the economic problem

Learning objectives By the end of this chapter you will be able to: ■ define and give
examples of the economic problem ■ explain the diff erence between economic goods and
free goods Introducing the topic Do you have everything you would like to have? Some
unfortunate people clearly need more goods and services. These are the people who lack
the goods and services needed for survival. If our needs for suff icient food, clothing and
housing are met, we will still want other products. Indeed, our wants are unlimited. The richer
we get, the more, and the better, quality products we would like. Many of us would like, for
instance, more foreign holidays and a new laptop. This chapter will look at why we cannot
have everything we would like. Wants: desires for goods and services. KEY TERM 3 TIP It is
very important to learn definitions. The more you apply a term such as scarcity in your work,
the more you will become familiar with it. You may also want to compile your own economics
dictionary by writing down terms in alphabetical order, as you come across them. Resources:
factors used to produce goods and services. The economic problem: unlimited wants
exceeding finite resources. Scarcity: a situation where there is not enough to satisfy
everyone’s wants. KEY TERMS 1.1 Finite resources and unlimited wants What stops people
enjoying all the products they would like to have is a lack of resources to produce them.
Resources, including workers and machinery, are scarce. This means that they are limited in
supply. The economic problem of not being able to satisfy everyone’s wants arises because
of this scarcity. There is no limit to people’s wants – they are infinite. For instance, people
want more and better clothing, healthcare and improved transport infrastructure. The number
of workers, machines, off ices, factories, raw materials and land used to produce these
goods and services, however, is finite. At any given time, for example, there are only a
limited number of workers and they can produce only a specified amount. This mismatch,
between what people want and the maximum that can be produced, gives rise to the
economic problem. Choices have to be made about how resources are to be used. The
continuing nature of the economic problem Scarcity continues to exist. More goods and
services are being produced today than ever before, but the growth in wants is exceeding
the growth of economic resources. People still want more products than the resources
available can produce. Over a period of time, wants continue to grow and change. The
economic problem in diff erent contexts The fact that people have to choose which products
to buy, which subjects to study, what jobs to do and which products to produce shows that
there are insuff icient resources. As consumers, we cannot have everything we want. We
have limited incomes. Students have to select which courses to study. It is not possible to
study economics and chemistry at the same time. Workers have to make choices about what
jobs they do. Some teachers may carry out other work in the evening, but when they are
teaching they are not working as writers! Time is in limited supply. Producers have to decide
what to make. Farmers cannot grow rice and wheat on the same land. They have to select
one crop as land is scarce. The government has to decide how to spend tax revenue.
Deciding to build a new hospital may mean that it cannot build a new school. GROUP
ACTIVITY 1 In your group, discuss and decide which of the following are scarce: a
vacancies for university degree courses b foreign holidays c healthcare. 1.2 Economic goods
and free goods The vast majority of goods and services are economic goods. This means
that it takes resources to produce them and so they are limited in supply. For example, a
carpet is an economic good. The material and labour used to produce it could have been
used to make Chapter 1: The nature of the economic problem 4 another good (or goods). It
is easy to find examples of economic goods. Almost every good and service you can think of
is an economic good. Your education is an economic good, since your teachers and the
other resources used to provide it could have been employed for making other products.
Free goods are much rarer. When most people talk about free goods, they mean products
they do not have to pay for. These are not usually free goods in the economic sense since
resources have been used to produce them. Economists define a free good as one that
takes no resources to make it. It is hard to think of examples of free goods. Sunshine is one
such example, so is water in a river. However, as soon as this water is processed for
drinking, or TIP used for irrigation of fields, it becomes an economic good. Remember that in
economics what determines whether a product is a free good is not whether people have to
pay for it, but whether it takes resources to produce it. Economic good: a product which
requires resources to produce it and therefore has an opportunity cost. Free good: a product
which does not require any resources to make it and so does not have an opportunity cost.
KEY TERMS Chapter 3.2 Influence of opportunity cost on decision making (Economic goods
and free goods) LINK Water in a river is a free good Cambridge IGCSE Economics 5
Summary You should know: ■ People’s wants continue to grow. ■ Resources such as
workers, machines and land are limited in supply. ■ The economic problem is that unlimited
wants exceed finite resources. ■ Economic goods take resources to produce them. ■ Free
goods exist without the use of resources. Multiple choice questions 1 Why does scarcity
exist? A Each year workers tend to produce less than previously B Machines wear out with
time C There are not sufficient resources to produce all the products people want D There is
a limit to people’s wants 2 Why will scarcity continue to be a problem in the future? A Prices
will rise B The quantity of resources will decline C Wants will continue to increase D World
population will fall 3 Which of the following is a free good? A Inoculation provided without
charge by the state B Products given away by a supermarket to attract customers C
Recycled paper D Wind coming in from the sea Four-part question a What is meant by the
economic problem? (2) b Explain why a car is an economic good. (4)