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MICROECONOMICS TOPIC 1 Higher Economics 2013-14

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THE BASIC ECONOMIC PROBLEM Microeconomics

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BASIC NEEDS Everyone in the world has four basic needs: Food Water Clothing Shelter Without these we would not survive

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WANTS When we have our basic needs met we can then start wanting luxuries A want is something that we do not need in order to survive. Once one want has been achieved we just want something else. We say that WANTS ARE UNLIMITED

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FACTORS OF PRODUCTION There are four factors of production 1. Land all natural resources 2. Labour all human resources 3. Capital (Industrial, Social, Private, Financial) all man-made resources 4. Enterprise the idea The resources need to produce goods and services are LIMITED.

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WHY DO WE HAVE LIMITED RESOURCES Resources are limited for two reasons. 1. Occupational Mobility this is the ability of a resources to change the job it does. Some resources are more flexible than others. (Industrial Capital vs. Land)

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WHY DO WE HAVE LIMITED RESOURCES 2. Geographical Mobility the ability of a resource to change its location Again some resources are more flexible than others. (Capital vs. Land)

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WAYS TO IMPROVE AVAILABILITY OF RESOURCES Land discovery of new resources e.g. a new oil field Using spare land to build a new factory Labour immigration could increase number of employees Training could be used to reduce the level of occupational immobility Capital research and development into new types of machinery etc.

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THE BASIC ECONOMIC PROBLEM As a result of UNLIMITED WANTS and LIMITED RESOURCES we have what is called the BASIC ECONOMIC PROBLEM. The basic economic problem is SCARCITY

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SCARCITY VS. SHORTAGE Scarcity and a shortage are not the same thing. Scarcity is when there is not enough resources to produce goods and services people want. Shortage is when there is not enough supply of goods and services to meet peoples wants

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CHOICES Because of scarcity all individuals, firms and governments have to make choices. Individuals have to choose what to buy from limited income Firms have to choose what to produce with limited resources Governments have to choose what services to provide from limited taxes

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OPPORTUNITY COST All choices result in something being sacrificed or not being chosen The item that is sacrificed is called the OPPORTUNITY COST

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OPPORTUNITY COST FOR INDIVIDUALS The opportunity cost for individuals is the next item on their list of preferences. For example if an individual had the choice between a bag of crisps or a bar of chocolate. If they chose the bag of crisps then the bar of chocolate would be the opportunity cost.

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OPPORTUNITY COST FOR FIRMS The opportunity cost for a firm is the next most profitable item that could be produced with the available resources. For example if they had the choice of producing denim shirts or denim jackets and chose denim shirts then the jackets would be the opportunity cost

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OPPORTUNITY COST FOR GOVERNMENTS The opportunity cost for a government is the next best service it could have provided. For example if they had the choice of a new school or a new hospital and they chose the hospital, the school would be the opportunity cost.

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ECONOMIC GOODS -V- FREE GOODS Economic goods these are goods that have a price. Something has to be given up in order to obtain them. These goods have an opportunity cost. Free goods these are goods where there is enough to meet everyones wants. E.g. Air. These goods do not have an opportunity cost

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ECONOMIC EFFICENCY As a result of limited resources it is important that countries/firms find ways to make the best use of them E.g. A machine that is designed to produce 1000 jackets but only produces 100 is not being use to its best Using a resource to its maximum potential is called ECONOMIC EFFICIENCY Economic Efficiency can only be achieved when three conditions are met.

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ECONOMIC EFFICENCY 1. Technical Efficiency when the fewest resources are used to produced each product 2. Allocative Efficiency using resources to produce the goods and services that people want 3. When all resources are employed all resources should be used and not lying idle

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EQUITY Economic efficiency should be achieved through SOCIAL JUSTICE and FAIRNESS this means that it has to be fair and just to everyone in society. However Equity and Economic Efficiency often conflict.

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BASIC ECONOMIC QUESTIONS Every country has the problem of scarcity. Each country therefore has to answer four basic economic questions when deciding on allocating its scarce resources. These are: 1. What to produce? 2. How much to produce? 3. How to produce it? 4. Who to produce it for?

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In order to answer these questions each country will have an economic system. There are 3 types of economic system and each answers the economic questions differently. PLANNED ECONOMY FREE MARKET ECONOMY MIXED ECONOMY

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PLANNED ECONOMY In a planned economy the government is in complete control of how resources are allocated. This type of system is often found in communist nations but the UK has had a planned economy. All resources are owned and controlled by the state. Examples: Cuba, North Korea and to a certain extent China

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PLANNED ECONOMY This system believes in re-distributing income and wealth so that all member of society are the same. They think that having resources owned by private individuals leads to inequality within a society.

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PLANNED ECONOMY - ANSWERING THE QUESTIONS What to produce? - this is decided by government planners, who estimate what they think the population needs. How much to produce? they decide on a fixed quantity of each product

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PLANNED ECONOMY ANSWERING THE QUESTIONS How to produce? government sets quotas for each factory and allocates the necessary resources. For whom? prices and incomes are controlled by the government so that every member of society is the same

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TASK Research countries that are mostly planned economies (repressed) Find out relevant economic information about them Find out advantages and disadvantages of being a planned economy Examples www.heritage.org.uk/index/rankings www.heritage.org.uk/index/rankings www.s-cool.co.uk/a-level/economics www.s-cool.co.uk/a-level/economics

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FREE MARKET ECONOMY Market forces deal with the basic economic problem. The government plays little or no part in the economy. No country has a pure free market economy as governments always have to be involved to an extent.

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SIX ESSENTIAL ELEMENTS To be a free market economy, six characteristics need to be met: 1. Resources are owned by private individuals 2. Consumers have CONSUMER SOVEREIGNTY (the consumer is King). What consumers want producers will produce. 3. Decisions are made on the basis of self interest. Producers want to maximise profits. Consumers want to maximise value for money. 4. Producers are free to produce what they wish. 5. Competition exists between producers and also between consumers 6. Resources are allocated by the PRICE MECHANISM. Increase in demand for a product will increase the price, meaning more producers will want to make that good, which leads to more resources being needed. A decrease in demand will mean producers moving the resources to more profitable products

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FREE MARKET ECONOMY - ANSWERING THE QUESTIONS What to produce? decided by consumers. What they want to buy, the producer will produce. How much to produce? decided by the consumers

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FREE MARKET ECONOMY - ANSWERING THE QUESTIONS How to produce? decided by the producer. Will use the most efficient method of production in order to keep cost down and maximise profits For Whom? - decided by the buying power of the consumers who have the highest incomes. IF YOU CAN AFFORD IT YOU CAN HAVE IT!

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MIXED ECONOMY All countries in reality have a mixed economy. Some though will be more planned and some more free market. In mixed economy the private sector and the public sector (government) work together in order to meet the needs and wants of the country. Countries like USA, UK and Hong Kong have mixed economies of varying level.

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TASK Research countries that are mostly mixed economies (free) Find out relevant economic information about them Find out advantages and disadvantages of being a mixed/free economy Compare and contrast these findings with those of your planned economy Examples www.heritage.org.uk/index/rankings www.heritage.org.uk/index/rankings www.s-cool.co.uk/a-level/economics www.s-cool.co.uk/a-level/economics