Humans have many different types of wants and needs. Economics looks
only at man's material wants and needs. These are satisfied by consuming (using) either goods (physical
items such as food) or services (non-physical items such as heating).
There are three reasons why wants and needs are virtually unlimited:
- Goods eventually wear out and need to be replaced.
- New or improved products become available.
- People get fed up with what they already own.
Commodities (goods and services) are produced by using
resources. The resources shown in Table 1.1 are sometimes called factors of production.
Table 1.1 Different types of resource
||All natural resources
||The physical and mental work of people
||All man-made tools and machines
||All managers and organisers
Types of Commodity
A free good is available without the use of resources. There
is zero opportunity cost, for example air. An economic good is a commodity in limited supply.
Expenditure on producer or capital goods is
The Economic Problem
The economic problem refers to the scarcity of commodities.
There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.
Society has to decide which commodities to make. For example, do we
make missiles or hospitals? We have to decide how to make those commodities. Do we employ robot arms or workers? Who is going
to use the goods that are eventually made? Do we build a sports hall in Wigan or Woking?
The opportunity cost principle states the cost of one good
in terms of the next best alternative. For example, a gardener decides to grow carrots on his allotment. The opportunity cost
of his carrot harvest is the alternative crop that might have been grown instead (eg potatoes). Further examples are given
in Table 1.2.
Table 1.2 Examples of opportunity cost decisions
||Should I buy a record or a revision book? |
||Should we build a music block or tennis courts? |
||Should we increase police pay or pensions? |
An economic system is the way a society sets about allocating
(deciding) which goods to produce and in which quantities. Different countries have different methods of tackling the economic
problem. There are three main types of economy.
A market or capitalist economy is where resources
are allocated by prices without government intervention. The USA and Hong Kong are new examples of market economies where
firms decide the type and quantity of goods to be made in response to consumers. An increase in the price of one good encourages
producers to switch resources into the production of that commodity. Consumers decide the type and quantity of goods to be
bought. A decrease in the price of one good encourages consumers to switch to buying that commodity. People on high incomes
are able to buy more goods and services than are the less well off.
In a command-planned or socialist economy the government
owns most resources and decides on the type and quantity of a good to be made. The USSR and North Korea are examples of command
economies. The government sets output targets for each district and factory and allocates the necessary resources. Incomes
are often more evenly spread out than in other types of economy.
In a mixed economy privately owned firms generally produce
goods while the government organises the manufacture of essential goods and services such as education and health care. The
United Kingdom is an example of a mixed economy.rtunity cost
is the value of the good or service forgone.