Applied Economics

Allocation of Resources,
Choice and Opportunity cost
 The three basic economic question.
 scarcity forces economist to make choices in order to allocate
resources effectively.
 Before making choices on resource allocation, every economy
needs to answer three basic questions.
1. What to produce?
2. How to produce?
3. For whom to produce?
 A deeper understanding
 What to produce: involves deciding which type of goods/ services are to be
produced, and in what quantities.
 How to produce: involves choice on how economists produce various
goods/services by combining different resources together. Ex: Using relatively
less human labor and more machines.
 For whom to produce: involves choices on how the produced good/services
are to be evenly distributed among population.
 Allocation of resources
 The first two of the three economic questions involve resource
allocation, while the last involves distribution of resources.
 Resource allocation refers to the assigning of available resources
to specific purposes, chosen among a range of alternatives.
 This involves answering the “what to produce” and “how to
produce” question.
Unlimited needs Problem of Limited
and wants Scarcity Resources

Three Economic Questions:

What to produce?
How to produce?
For whom to produce?
 Changes in resource allocation

 If an economy changes its pattern of allocating resources towards the

production of the concerned good/service.
 At times, the society produces goods in an inappropriate way relative to
what is socially desirable.
 Factors of production
 Factors of production include the various types of resources
involved in producing the required goods and services.
 These are grouped under four categories:
1. Land: includes all natural resources such as minerals, underground
water, oil reserve, etc.
2. Labor : includes the physical and mental effort of individuals
involved in productions
3. Capital: includes machinery, buildings, transport system.
4. Enterprise: includes the human skill possessed by individual, such
as effectively running and managing a business.
 Opportunity cost
 Refers to the next best alternative which is given up in
order to obtain something else.

For example: a consumer uses their P200 to buy books. They

also choose not to spend this money on other items such as
clothes, CDs, etc.
 Circular Flows in the Market Economy
Markets is any arrangement that
Product Markets
enables buyers and sellers to interact,
get information and engage in

Good es
Ser d and

Servi
es
exchange.
vic

eu
o

c
a nd
Spe
Go

en
Rev Household consists of several

n
ding
individuals, but we will view each
household as acting like a single
decision maker.
Business Firms Households
Business firms are economic units
formed by profit-seeking entrepreneur
ces
ts

Income
who organize land, labour and capital
Paymen

Resource
Resour
ce s

to produce goods and services

our
Res

s
Resource
Markets
 A business firm may be a:
Sole proprietorship owned by one individual who makes all business
decision.
Partnership owned by two or more individuals
Corporation owned by shareholders who own stock in the firm.
The role of the Entrepreneur
Enterpreneur have the ability to discover more
effective ways of organizing resources to
produced the goods and services that consumer
desire.
Thank you!