©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteIGCSE®/OLevelEconomics1.1ThebasiceconomicproblemS1©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteFactorsofproduction•Naturalresources=land•Man-maderesources=capital•Humanskillsandeffort=labour•Businessknow-how=enterprise©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteProductionUsinginputs(resources)tomakeoutputs(goodsandservices)tosatisfytheneedsandwantsofconsumers©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteConsumptionUsingupgoodsandservices(products)tosatisfyconsumers’needsandwants©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteThebasiceconomicproblemHumanwantsareunlimitedbutresourcesarescarce©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteSo,weallhavetomakechoicesThereisalimitedamountofresourcessuchasrawmaterials,machines,factoriesandskilledworkers.Butthereareanumberofdifferentwaysinwhichtheycanbeused.Resourceallocationthereforeinvolvesdecidinghowbesttousescarceresourcestosatisfyasmanyneedsandwantsaspossible©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteChoiceSimilarly,peopleandgovernmentsonlyhavealimitedamountofmoneybuthavemanyneedsandwantstosatisfy$100Food?Entertainment?Clothing?Defence?Healthcare?Roads?$100bn©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteOpportunitycostOpportunitycostisthecostofchoice•WhatwouldyoubuywithUS$10?•HowshouldthegovernmentspendUS$250million?(Or,shouldthegovernmentcuttaxesbyUS$250million?)•Whatoccupationwillyouchoosewhenyoufinishyourstudies?•HowshouldanewbusinessinvestUS$20million?•Shouldweconservemorenaturalresources?…andwhatarethenextbestalternativesforegone?©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteProductionpossibilitycurvesAfirmproducingcarsandtrucksWhatistheopportunitycostofproducing20moretrucks?©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteAneconomyproducingconsumergoodsandcapitalgoodsWhatistheopportunitycostofproducing15moretonnesofconsumergoods?Productionpossibilitycurves©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteProductionpossibilitycurves•Productionpossibilitycurves(PPCs)showthemaximumcombinedoutputoftwoormoreproductsafirmoranentireeconomycanproducewithitsavailableresources•Resourcesarebeingusedefficientlyiftheyareproducingtheirmaximumoutput•But,becauseresourcesarelimited,producingmoreofoneproductmeansproducinglessofanother•PPCsarethereforeausefulwayofshowingtheopportunitycostofproducingmoreofoneproductintermsofhowmuchofanothermustbegivenup©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteIGCSE®/OLevelEconomics2.1EconomicsystemsS2©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteResourceallocationBecauseproductiveresourcesarescarcerelativetohumanwantswemustdecide:Whattoproduce?Howtoproduce?Whotoproducefor?Shouldweuseresourcestoproduceasmanyconsumergoodsaspossibleorallocatesomeresources,forexample,tobuildnewroadsortoprovidebetterhealthcare?Whattoolsandmachinerywillbeneeded?Howmanyworkerswillberequiredandwhatskillswilltheyneed?Isitcheapertoemploymorelabourormoremachinery?Shouldpeopleinthegreatestneedgetthegoodsandservicestheyrequire?Orshouldtheybeproducedforpeoplewhocanpaythemostforthem?Whatpriceshouldtheypay?©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteEconomicsystemsWhoinaneconomydecideswhatgoodsandservicestoproduce,howtoproducethemandwhotoproducethemfor,andhowarethesedecisionsaremade?MarketeconomyMixedeconomyPlannedeconomyWho?PrivatesectorfirmsandconsumersHow?ThepricemechanismWho?Privatesectorfirmsandconsumers,andagovernmentHow?ThepricemechanismandgovernmentplanningWho?GovernmentHow?Governmentplanning©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteEconomicsystemsChinaCubaNorthKoreaDenmarkFranceItalySwedenUKManydevelopedeconomiesArgentinaMauritiusNepalParaguayBahamasSingapore©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteThemarketeconomicsystemPrivatesectorproducersConsumersGoodsandservicesMoneyProductionExchangeConsumptionInafreemarketeconomicsystemalldecisionsaretakenbyprivatesectororganizationsandindividuals.Thereislittleornoroleforgovernmentorapublicsectorandthereforelittleornotaxationorpublicspending.©BrianTitley2012:thismaybereproducedforclassusesolelyforthepurchaser’sinstituteThepricemechanismAmarketisanysetofarrangementsthatbringstogetheralltheproducersandconsumersofagoodorservicesothattheycanengageinexchange.PrivatefirmsproducegoodsandservicestomaximizetheirprofitsConsumersconsumegoodsandservicestomaximizetheirutility(satisfaction)AsconsumerdemandforaproductrisesProductionbecomesmoreprofitable,soproducersincreaseoutputProductionbecomeslessprofitable,soproducersreduceoutputMarketpriceandquantitytradedMARK