The Economic Problem

Economics is: “the study of how to best

allocate the earth’s limited resources to

satisfy humans’ unlimited wants & needs”

Economic Concepts

Scarcity: there are not enough resources to satisfy all of people’s wants

if something is scarce, it will have a market value – called an economic good

the earth’s resources are finite

humans’ wants and needs are infinite

Free Goods do not have market value because one person using some doesn’t leave less for another (eg. Sea water, sunshine, air)

Economic Study

Economics is a social science - a subject concerned with human behaviour

Theories are difficult to study because:- many things may change simultaneously (economists try to isolate singular events by saying ‘all other things remaining equal’ or ‘ceteris paribas’)- events can not be tested in labs

Economic Study

Economic models are developed to illustrate economic events by isolating individual relationships – these are then used to make forecasts about how one event will affect others in the future

Eg. If prices for chocolate rise, we will buy less chocolate and more crisps

Why Do Economists Disagree?

Different opinions about who should be included in economic statistics

Technical, cultural, & social changes affect behaviour and its interpretation

Views differ on what policies should be carried out to affect the economy in the desired way

Economic Choices

Because of scarcity, economic choices are made at all levels – consumers, firms, gov’ts

Choice involves a trade-off

Economic trade-off’s are measured by Opportunity Cost

Opportunity Cost

Measures the cost of any economic choice in terms of the next best alternative foregone

Eg. The opp. cost of working hard on homework is the party you had to miss

Eg. The opp. cost of the gov’t spending £30B on a new aircraft carrier was the potential benefits to the NHS foregone