SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

Chapter 1
Basic economic problem are allocation of a nation's scarce resources between competing uses that represent infinite wants. 1.1. Finite Resources All countries there is a finite quantity of these resources, because there is only a limited quantity economists say that resources are scarce. Scarce resources are the amount of resources available is limited. Unlimited Wants Needs are the basic requirements for human survival, some of these needs. Wants are peoples desires for goods and services. The Economic Problem All countries have to deal with what economists call the basic economic, because the would resources are scarce or finite and people's wants are infinite. Infinite Wants Finite or Scarce Resources

Demand Supply Figure 1.1. The basic economic problem Basic economic problem To overcome the basic economic problem, important decisions have to be made . What to produce? because it is impossible to produce all the goods that people want. A country must decide which goods will be produced. How to produce Goods can be produced using a variety of different production methods, the four factors of production can be organized in different ways to produce the same goods. For whom to produce ?once goods have been produced there has to be a method of distribution. This means that the goods have to be shared in some way between members of the population. 1.2. The Factors of Production Production is a process that involves converting resources into goods or services. These goods and services are provided to satisfy the needs and wants of people. The example given in the margin on the next page all involve using range of resources to produce goods or provide service. Economists put these resources into different categories called the four factors production. These resources are often referred to as the four factors of production :
AAAACCOUNTING IGCSE

SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

Land Land also includes natural resources such as coal, oil, iron ore, rainwater, forests, rivers and fertile soil. Some of the land resources used by businesses are nonrenewable , this means that once they have been used they cannot be replace . example include mineral deposits like coal, oil, diamonds and limestone. It is likely that one day these resources will completely run out. Renewable land resources are those like fish, forests and water which are replace by nature, these resources should not run out but there is a risk that if some them are not protected they could disappear. Labour Labors the workforce in the economy. Manual workers, skilled workers and managers are all members of a nation's workforce. The quality of individual workers will vary considerably, each worker is unique, processing a different set of abilities, characteristic, skills, knowledge intelligence and emotions. The value of an individual worker to a business is their human capital. It is possible to increase the value of human capital through training and education. This will help to make workers more productive. Capital Capital is often said to be an articial resource because it is made by labour, there are two types of capital. Working capital or circulating capital refers to stocks of raw materials and components that will be used up in production. It also includes stocks of finished goods that are waiting to be sold, retailers such as supermarkets and claim stores often hold large quantities of stocks because they specialise in selling finished goods. equipment and furniture used in production. It is fixed because it will not be converted into a final product. Fixed capital is used in production to convert working capital into goods and services. A company like Honda would have very large stocks of fixed capital because their production methods involve using large amounts of hi-tech machinery. Enterprise Entrepreneurs play a special role in the economy, they are responsible for setting up and running businesses. Without them production would not take place. What do entrepreneurs do exactly? They come up with a business idea. This might involve the production of a complementary new product. However, this is unusual. Most new businesses supply goods or services that are currently produced by others. That said, an entrepreneur may feel that there is a gap in the market for a slightly different product, or that it is possible to supply ion is said to be exactly the same product more effectively.
ACCOUNTING IGCSE

SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

They are business owners, they usually provide some money to help set up a business and are responsible for its direction. For examples, a business owner might decide to expand the business in the future or extend the range of products. Entrepreneurs are risk-takers. For example, they are likely to risk their own money in the venture. If the business collapses they may lose some or all of the money. However, if the business is successful they may make a lot of profit. But when they start up they do not know what will happen- they are taking a risk. Labour and capital intensive production Where production relies more heavily on labour relative to machinery. Therefore production is said to be labour intensive. For example in china labour is very cheap and many firms choose labour-intensive production methods. The provision of services is also generally labour intensive. On the other hand. If relatively more capital is used than labour, production is said to be capital intensive. Firms in western economies often favors capital intensive production methods because labour is more difficult to manage. The production of fast-moving consumer goods often relies on heavily automated plants. Increasing production If the economy is to produce more goods and services, more factors of production are likely to be needed. For example, a farmer may acquire more land to increase the production of wheat. A bottling plant may employ more staff to work a night shift to increase production. Whenever businesses plan to increase production will almost certain use more production factors. Productivity Productivity the amount of output that can be produced with a given quantity of resources. Productivity is the output per unit of input. For example, the productivity of labour is the output per worker. It can be calculated by dividing total output by the number of workers employed. If a car manufacturer produced 24,000 cars in a year with a workforce of 2,000. Labour productivity would be 12 cars per worker ( 24,000 2,000 ). Raising productivity in an economy is highly desirable. It means that more goods and services can be produced with the same, or fewer, resources. Firms try to increase productivity because they will lower costs and make more profit. Productivity may be increased by firms in a number of ways. For example : By introducing new working practices By introducing incentive schemes to encourage people to work harder By using new and more efficient machinery By retraining workers to become more skilled 9
AAAACCOUNTING IGCSE

SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

1.3. Choice and Opportunity Cost Choice Deciding between alternative uses of scare resources, whichever approach is used to resolve the basic economic problem, all decision makers are faced with choices. this choice is faced by : Individuals have to choose how to spend their limited budget Firms may have spending on an advertising campaign, training its workforce or buying a new machine A government may have to decide whether to spend on increasing disability benefits, building new hospitals, providing better care for mentally or building a new motor way. Opportunity Cost Opportunity cost when choosing between different alternatives it is the benefit cost from the next best alternative. For examples : A goverment decides to spend more one defence and, therefore, cannot spend as much on improving the country's infrastructure 1.4. The implications of particular courses of action in terms of opportunity cost. Examples above can place its spending desires in order of preference, the opportunity cost can be identified. Once the government has chosen the best alternative, the opportunity cost will be the benefit lost from the next best alternative. Assume that the government's spending desires are placed in order of preference as below : 1. New motorway, 2 new hospital, 3 increase disability benefit and 4 improve care for the mentally ill. In this example, the new motorway is the government's preferred choice. Therefore the $ 5 billion will be allocated to this project. The opportunity cost in this case is the benefit lost from not building the new hospital, i.e. the benefit lost from the next best alternative.

PRODUCTION POSSIBILITY CURVES ( PPCs ) or PRODUCTION POSSIBILITY FRONTIERS. Production possibility curve (PPCs) are a line which shows the different combinations of two goods an economy can produce if all resources are used up. 18 A 16 14 10 8 4
ACCOUNTING IGCSE

E C

SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

D 10

Figure 1.2. A production possibility curve for a country NOTE : A = At point A 18 million units of consumer goods are produced and zero capital goods. D = At point D 10 million units of capital goods can be produced and zero consumer goods. B = At point B a combination of 16 million units of consumer goods and 6 million units of capital goods can be produced. C = At point C a combination of 10 million units of consumer goods and 9 million units of capital goods can be produced. F = At point F a combination of 10 million consumer goods and 6 million units of capital goods can be produced. At this point not all resources in the country being used. This is because point F is inside the PPC. A country should aim to push production so that it is on the PPC. E = The combination of goods represented by point E is not possible. This is because it is outside the PPC. The country does not have the resources to produce 14 million units of consumer goods and 9 million units of capital goods.

Competition Test
MAY/JUNE AND OCT/NOV PERIOD 1. THE ROYAL MAIL The following is adapted from a leaflet the UK Royal Mail sent to its customers in 2005. We are investing in the postal service so that it is consistent and reliable and remains one of the best in Europe. You can trust the Royal Mail with your post. 99.9 % of all mail gets delivered safely and quickly to the right address. Sometimes letters have the incorrect address or no address at all. At least 92.5 % of the First Class letters arrive by lunchtime the next working day. (In France barely 80 % of the First Class mail is delivered on time.) we are determined to manage this better and are investing in technology and training. Our prices are rising by less than inflation and are amongst the lowest in Europe. In April the price of First Class post will go up from 1.12 in Germany up to 1. There will now be only one delivery a day. Previously, when mail was sorted by hand, it was impossible to sort and deliver it all at once. Now, more mail is sorted automatically and overnight. A single delivery helps us to keep our costs down. We need to make profits so that we can invest in better equipment , better technology and better offices, and also pay our staff more for doing a responsible job. (a) Explain what is meant by factors of production. (4)
AAAACCOUNTING IGCSE

SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

(b) How has the Royal Mail's use of these factors of production changed ? (2) (c) Explain how the proposed new investment will change the Royal Mail's fixed cost and variable cost. (4) (d) Discuss how the rise in price from 0.30 might affect demand for substitute methods of communication. (4) (e) Is there enough evidence in the article to support the Royal Mail's statement that it is one of the best in Europe ? (6)

Review Quick Check

1. What is an example of the factor of production 'capital' ? A. a truck B. a truck driver C. a truck driver's savings D. a truck driver's wage Which economic question is least likely to arise as a result of scarcity ? A. For whom shall we produce ? B. How shall we produce ? C. What shall we produce ? D. When shall we produce ? The diagram shows the choices for an individual between leisure and earnings. 24201612840

2.

3.

Hours of leisure per day

.x .y 20 40
Earnings $

60

80

100 120

What is the opportunity cost to the individual of the extra earnings when moving from position Y ? A. $ 20 B. $ 80 C. 4 hours of leisure per day D. 8 hours of leisure per day 4. A student decides to stay in her room to do some work rather than going to the cinema. What is the opportunity cost of her decision ? A. The enjoyment she would have derived from a visit to the cinema B. The improvement in the mark she obtains for her assignment C. The increase in her electricity bill D. The money she would have spent in the cinema
ACCOUNTING IGCSE

SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

5. The diagram shows the production possibilities of an economy

Costumer goods

X Y 0
Capital goods

What will be the effect on current and future living standards of a movement from X to Y on the curve? Current living Future living standards standards A Decrease Decrease B Decrease Increase C Increase Decrease D Increase Increase 6. Which statement best explains why drought is an economic problem? A. Drought cannot be controlled. B. Rainfall is unreliable. C. The effects of drought involve the government. D. Water is a scarce good. 7. A hospital cannot treat all the people that need treatment. This is example of A. Excess supply B. Limited wants C. Scarcity D. Unlimited resources 8. In 2001 the government enquiry approved a major new air terminal for London, Which will create many new jobs. However, it will cause extra noise and pollution. Compensation will have to be paid to some people whose houses will be demolished. A. Externalities B. Free market economy C. Income creation D. Opportunity cost 9. A government is faced with the choice of raising taxation or cutting public spending. Of what this an examples? A.Conservation of resources B.Monetary policy C.Opportunity cost D.Substitution of factors 10. Hong Kong lacks natural resources. Its best asset is its people. What can be concluded about Hong Kong's factors of production?
AAAACCOUNTING IGCSE

SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

A B C D

Well supplied Capital Enterprise Labour Land

Poorty supplied Enterprise Labour Land Capital

11. A boat owner employs a crew to catch fish to sell on the market. Which factors of production are involved in this activity? A. Labour, capital and enterprise only B. Land, labour and capital only C. Land,labour and enterprise only D. Land, labour, capital and enterprise 12. Commercial companies are reclaiming marsh land to construct golf courses. What is the opportunity cost to society ? A. The expense of installing drainage B. The natural environment that is lost C. The profits of the companies D. The value of the land cleared 13. A government decides to spend more one defence and, therefore, cannot spend as much on improving the country's infrastructure. What economic idea is illustrated by this decision? A. Budget surplus B. Monetary policy C. Opportunity cost D. Specialization 14. What is not factor of production? A. Company shares B. Machinery C. Raw materials D. Unskilled workers 15. A major airline needs a range of people and equipment. These can be divided into factors of production. Which is allocated to its correct factors of production? People or equipment Factor of production A. Aircraft Capital Computer network Land B. Pilots Enterprise shareholders Labour C. D. 16. Commercial companies are cutting down tropical rainforests for harwood timber. What is the opportunity cost to society of this activity?
ACCOUNTING IGCSE

SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

A. Tax revenue from the sale of the timber B. The environment that is destroyed C. The products made from the timber D. The profits of the companies 17. A woman playing a quiz game starts with no money, but correctly answers the question that is worth $ 4000. The next question is worth $ 10.000 but is she answers incorrectly she will leave the game with no money. What is her opportunity cost of choosing to answer the $ 10.000 question if her answer is incorrect? A. Nothing B. $4000 C. $6000 D. $10.000 18. What is the basic economic problem facing all economies ? A. Inequality of income B. Insufficient resources C. Low economic growth D. Shortages of skilled labour 19. A farmer decides ti use a more fertile field. As a result he is able to produce the same output as before but with fewer workers and less equipment. This is a substitution in which A. Capital replaces labour and land B. Labour replaces capital and land C. Land replaces capital and enterprise D. Land replaces capital and labour 20. Which of the following is a factor of production ? A. The payment of interest on a bank loan B. The profit declared by a company in its annual report C. The skill of the managers of abusiness D. The taxes paid to the government 21. What is the basic economic problem facing all economies ? A. Inequality of income B. Insufficient resources C. Low economic growth D. Shortages of skilled labour 22. Construction companies are building new houses on previously used for farming. What is the opportunity cost to society of this activity? A. Improved living conditions B. Less congestion in city centers C. More homes for new homeowners D. Some farm output

land

23. Although people may satisfy their basic needs there is always something more they want. To what economic issue does this statement refer?
AAAACCOUNTING IGCSE

SMA DARUL ULUM 2 UNGGULAN BPPT RSBI JOMBANG

A. B. C. D.

Exchange Market forces Scarcity Income distribution

24. What is an example of the factor of production enterprise ? A. A shop assistant B. A shop's profits C. A shop owner D. A shopping centre 25. Which of the following is a factor of production ? A. The payment of interest on a bank loan B. The profit declared by a company in its annual report C. The skill of the managers of a business D. The taxes paid to the government

ACCOUNTING IGCSE