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1.1.3 The Economic Problem

Resource Scarcity

The world has a finite amount of resources.

  • We have a limited amount of things like land, water, oil, food, etc.

This means that economic agents can only obtain a limited amount of resources at any moment in time.

For example:

  • A family cannot have everything that it wants.
  • A government might want to build new hospitals, but the lack of finances prevents it from doing so.
  • A firm may want to build a factory, but might not have the resources to build it.

Keyword

Economic good - a scarce resource

Infinite wants, but finite resources

People actually have a limited number of needs that require to be satisfied if they are to survive as human beings.

What are basic human needs?

  • Food
  • Water
  • Shelter
  • Clothing

You can likely thing of just a few more things that humans cannot survive without (an iPhone is not one!) - the point I am trying to make is that this list is finite.

Human Wants

Human wants on the other hand, as opposed to human needs, are completely infinite.

There will always be something new that people may want.

For example:

  • My economics teacher would like a house that doesn't fall apart every 2 minutes.
  • A family may want a bigger car.
  • An adult may want a higher salary.
  • A student may want more friendships.

The Basic Economic Problem (BEP)

To summarise: we have scarce resources, finite needs, but infinite wants which inherently we want to be satisfied.

Economic agents need to make rational choices.

Limited resources have to be allocated between competing uses.

Every single choice includes a range of alternatives. For example, should the government spend £10B on nuclear weapons, or giving the elderly greater care?

A rational economic agent makes the choice regrded as best, however all other choices will be foregone

Opportunity cost

Therefore we arrive at opportunity cost, which is the value of the next best alternative foregone when a decision is made.

It is important because it shows what must be given up when choosing one option over another, helping economic agents allocate scarce resources more efficiently.

FREE goods do not have ANY opportunity cost.

For example, the opportunity cost for a government of a new warship might be the loss of three new hospitals. The opportunity cost here is the three new hospitals that could have been built.

Economies

The mere existence of this basic economic problem lends credence to the creation of an economy - something that tries to solve the BEP.

You will learn more about the different types of economies in 1.1.6.