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The Basic Economic Problem

The document discusses the basic economic problem of scarcity and opportunity cost. It defines the key concepts of needs and wants, and explains that resources are finite but human wants are unlimited. This scarcity of resources relative to human wants is the fundamental economic problem. The document also discusses opportunity cost, using production possibility frontier (PPF) curves to illustrate that choosing one alternative requires forgoing the next best alternative.

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261 views

The Basic Economic Problem

The document discusses the basic economic problem of scarcity and opportunity cost. It defines the key concepts of needs and wants, and explains that resources are finite but human wants are unlimited. This scarcity of resources relative to human wants is the fundamental economic problem. The document also discusses opportunity cost, using production possibility frontier (PPF) curves to illustrate that choosing one alternative requires forgoing the next best alternative.

Uploaded by

maika bateg
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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THE BASIC ECONOMIC

PROBLEM
SCARCITY, CHOICE AND
OPPORTUNITY COST

11/7/15

DAVID AKO (DE MEANEST)

The Basic Economic Problem

Key Lesson Objectives


Differentiate between needs and wants
Explain the basic economic problem
Define opportunity cost and illustrate the
concept with examples
Identify and explain the classification of
resources in economics
Define economics
Discuss the importance of studying economics
Use PPF to illustrate the concept of
opportunity cost
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Needs and Wants


Needs the necessities of life e.g. Food,
clothing, shelter, warmth, medical care
Wants those things that make life
enjoyable and pleasurable e.g. Designer
clothes, cars, mansions
Class Discussion:
Do needs and wants change over time?
Why is man never satisfied with material
possessions?
Human wants are
infinite/insatiable/unlimited
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Every need or want can be satisfied


through the consumption of a good or
service
Goods and services are produced with
resources ( factors of production) which
are finite and have alternative uses.
The Basic /Fundamental economic
problem is the scarcity of resources
relative to human needs and
wants
a. Finite resources vrs infinite needs and
wants
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Economic Resources
These are the factors of production that are used to
produce goods and services.
Land all natural resources that are used to produce
goods and services E.g. rivers, forests, mineral
deposits, etc. (receives rent)
Labour physical or mental human contribution
towards production. E.g. nurses, doctors, teachers,
labourers (receives wages/salary)
Capital man made resources that are used to
produce goods and services . E.g. machinery,
buildings, computers etc.(receives interest)
Entrepreneur the individual who takes risk by
employing other resources to produce goods and
services. E.g. Bill Gates, Steve Jobs, (receives profit)
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Structured Questions

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Choice and Opportunity Cost


Choice is imperative because of scarcity
The exercise of choice implies the sacrifice or
forgoing of some other need or want
Opportunity cost is the next best
alternative forgone when choice is made
or
The benefit that could have been
derived from the next best alternative
use of a given resource
Discussion
When will opportunity cost be zero?
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Structured Questions

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Classwork

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Homework

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Opportunity Cost and the Production


Possibility Frontier

The PPF is a curve that shows the various


maximum possible combinations of any two
goods that can be produced in an economy
given full employment
Assumptions of PPF
a. There is full employment
b. The economy produces only two goods
c. There is a fixed resource endowment(limited
resources)
d. Technology is constant
e. Resources are occupationally mobile
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Illustration of PPF
An economy can produce capital goods
and food as illustrated in the table below:
Option

Capital Goods
(tonnes)

Food
(tonnes)

125

100

50

75

100

50

150

25

200

250

These combinations of output can be


illustrated as follows
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Capital Goods
X
125

100

75

F
C

50

D
J

25

0
Y
50

100

150

200

250

Food
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What is the opportunity cost of increasing food


production from 100 tonnes to 150 tonnes?
How much food must be given up if production of
capital goods is increased from combination D to
combination B?
Why is point F unattainable?
Note:
a. opportunity cost is measured by the slope/gradient
of the PPF
b. The PPF above has a constant slope. Why is this so?
. Why is point J an inefficient combination?
. Any combination of output that lies on the PPF
indicates efficiency in the allocation of resources
. Any combination of output that lies within the PPF
indicates inefficiency it the allocation of resources
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Food

How does the slope of a concave PPF


change as increasing quantities of one
good is produced?
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Shifts in the PPF

Causes
a. Technical progress technological
advancement
b. Increased productivity (efficiency) of
labour
c. Increased capital investment
d. Discovery and exploitation of new
resources
e. Reallocation of resources
f. Producing in accordance with
comparative advantage
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