IB Economics

Basic economic problem

 Economics Experiment

What was the problem?

How did you resolve the problem?

Was your solution fair (equitable)?

What other solutions did you discuss?

How does this relate to any real world situations?

All societies face the same problem whether they are:

· Capitalist (Free Market)

· Mixed (mixture of private enterprise and government production)

· Planned (state or government control, communist)

The problem is scarcity

There are scarce resources but unlimited wants.

Economics is the study of how this basic problem is dealt with

Each society must decide how to allocate its scarce resources in order to satisfy as
many wants as possible, and also give some consideration to the types of wants
they are satisfying.

How should society allocate scarce resources to provide

1. Education
2. Armed forces
3. Health care
4. Tickets for a football match

How are these decisions made in different countries?

 What do you know so far?

1.What is the basic economic problem?

2.Why is economics the study of choices?

3.How does price help in allocating scarce resources?
Choices have to be made and every choice involves an opportunity cost.

Opportunity cost is a key concept in economics. It refers to the next best

alternative foregone. If resources were used to produce a product what
would have been the next best product they could have made.

All economic goods or services have an opportunity cost.

Free goods have zero opportunity cost. Air is the standard example but with
air pollution even this is no longer free in the strict sense of the word.
Resources are grouped into 1 of 4 categories and are referred to as the
factors of production.

· Land: Rewarded with Rent

· Labour: Rewarded with Wages

· Capital: Rewarded with Interest

· Enterprise: Rewarded with Profit

Land
All natural resources. Often regarded as fixed although can be made more productive.

Labour
Human Resources. The contribution of labour to the productive process can be increased.

Capital
Physical Capital: Machines, buildings and tools. Investment increases the stock of capital if it is
greater than depreciation
Human Capital: skills and knowledge of people

Enterprise
Refers to the entrepreneur who organises the resources and takes the risk
As a result of the economic problem the key questions that any society
needs to answer are:

1. What to produce?

2. How to produce?

3. For whom to produce?

How are these questions answered in different societies like a free market
or capitalist economy, a command economy and a mixed economy?
1.What is the basic economic problem?

2. What is meant by opportunity cost?

3. What are the 4 factors of production?

4. Which factor of production is rewarded with rent and

which is rewarded with interest?
5. Can you do better than this?