Fundamental Economic Concepts: Resources, Scarcity, and Systems

The Basic Economic Problem

The basic economic problem concerns allocating scarce resources to satisfy unlimited needs and wants.

Economic Agents

Economic agents include individuals or households, firms (private businesses), and the government (public sector). Private firms aim for profit, while the public sector provides services like education and healthcare.

Goods and Services

Goods are physical items produced, bought, and sold. Services are non-physical provisions paid for by customers.

Needs vs. Wants

Needs are essential goods and services for survival. Wants are non-essential goods and services desired by economic agents.

Factors of Production

Factors of production are resources needed to produce goods or services:

• Land: Natural resources.
• Labor: Human resources (skilled and unskilled).
• Capital: Manufactured resources.
• Enterprise: Organization of other factors.

Rewards for Factors of Production

The rewards are:

• Land: Rent
• Labor: Wages and Salaries
• Capital: Interest
• Enterprise: Profit

These four rewards are collectively known as income.

Opportunity Cost

Opportunity cost is the value of the next best alternative forgone when making a decision. Decision-makers usually choose the option with the greatest economic return.

Economic Systems

Market Economy

All decisions are made by private individuals with no government intervention.

Planned Economy

The government makes all production decisions to maximize social welfare. Private firms are not allowed. Goods are produced for everyone, especially those with low incomes.

Mixed Economy

A combination of market and planned economies, aiming to overcome the disadvantages of both.

Production Capacity

The productive and economic capacity is a company's ability to produce maximum goods and services. This can be efficient, inefficient, or unattainable.