The Basic Economic Problem
Scarcity means that economic resources are not enough to completely satisfy our wants. Scarcity arises because human wants are unlimited and economic resources are scarce.
All the scarce materials found on the earth are called resources. These include natural resources, machinery, people and so on.
Why are resources important?
Resources are important because they are used to make goods and services to satisfy human wants.
Human wants are unlimited. They are always growing and changing. When we satisfy one want another one will come up.
These are things that satisfy our wants. Goods are made with scarce resources.
Part of a nation’s resources is used to produce services that people want to consume as well as goods. E.g. Education, health, transport, communication, hotel, catering, tourism, entertainment etc.
Needs and wants:
Wants are goods and services that are not necessary for our survival, they give us pleasure. Example TV, motorcars, telephone etc.
Needs are the goods and services that are necessary for our survival.
Example: Food, clothing, house, medicine etc.
Free goods are goods that are unlimited in supply. They are not scarce goods. They have no opportunity cost. Example: ice at the North Pole, sand in a desert, air.
Economic goods are scarce goods. These are the goods and services that are produced by using the scarce economic resources.
Wealth and income
The real wealth of a nation consists of its capital like roads, railways, houses, factories, machines and other stock of capital goods available to use or consume in the future.
The real income of a nation consists of goods and services produced by its resources over a given periods of time.
Thus, wealth is essentially a stock of goods that has been accumulated , where as income is a flow of both goods and services measured over time.
People cannot find enough resources to satisfy all their wants and needs, so they must choose the most urgent wants and satisfy them first. This is called choice.
Choice involves an opportunity cost.
Why is choice necessary?
Choice is necessary because resources have alternative uses.
EXERCISE : I
Scarce Resources have Alternative uses:
Below is a list of resources. See how many alternative uses you can find for them, that is, see how many different goods and services they can help to produce.
1. An area of farmland.
2. A person who is good at Mathematics.
3. A shovel.
4. An egg.
Opportunity cost: The cost of choice
Human wants are unlimited and economic resources are scarce. Therefore we have to make choice. When we make a choice something has to be given up or sacrificed. The thing that we give up is the opportunity cost of what we have chosen.
Example: Ahmed has just enough money to buy either a coca cola or an ice cream. He chooses the ice cream. His opportunity cost is the coca cola that he gave up.
Opportunity cost arises not only when we buy things, but also when we choose what goods and services we produce.
For example, in deciding to use a piece of land to build a new sports complex, we may be going without the benefit new houses.
The Next Best Thing
Choosing between goods and services involves a very special cost . Now imagine that you were unable to get any of these items. Copy and complete the table.
What have I just bought
What could I have bought instead?
Four bed room house
Box of chocolates.
A ticket to the cup final
In the second column you have listed your second best choices, or your next best alternatives. For example, if you had bought the compact disc player, you may be going without the benefit of a record -player. The benefit of the record player given up is the real cost of owing the compact disc player .The real cost of choosing one thing and not another is known as the opportunity cost. This measures the benefit you could have had from the next best alternative you have gone without.
1.3 Implications of particular courses of action in terms of opportunity cost.
Opportunity cost arises not only when we buy things, but also when we choose what goods and services to produce. For example, in deciding to use a piece of land to build a new sports complex, we may be going without the benefit of new houses.
EXERCISE : 3
If there were enough resources to produce everything everybody wanted, would there be any opportunity cost? Explain your answer.
1.4 Production, consumption and exchange
All the economic activities can be classified into three groups. They are production, consumption and exchange:
Production means producing goods and services to satisfy human wants.
Producer: The people who make and sale goods and services are known as producers.
This describes the using up of goods and services in order to satisfy our wants.
A person who uses up goods and services
Goods, which are wanted for their own sake because they provide immediate satisfaction.
Example: food, clothing, a household’s furniture, a family car etc.
Durable consumer goods:
These are the consumer goods that have a fairly long life. Many of them last for several years.
Example: TV, table, chair.
Non-durable consumer goods:
These are the commodities, which are used up immediately or in a short period of time. Some of these are single use goods. Example: food, soap, toothpaste etc.
These include the services that we use in modern life.
Example: transport, entertainment communication, legal, education, and health services, etc.
Exchange is the act of buying and selling goods and services either in the form of barter or through a market.
The modern system of exchange depends upon the use of money. We sell our goods and services for money and then use this money to buy the goods and services that others have produced.
1. What is the basic economic problem common to all societies?
A. The allocation of scarce resources.
B. The elimination of inflation.
C. The need to achieve full employment.
D. The need to reduce taxation.
2. How can economics be defined?
A. Economics is a study of limited resources only.
B. Economics is a science that studies limited wants only.
C. Economics is a social science which studies human behavior as a
relationship between ends and scarce means which have alternative uses .
D. Economics is a study of limited wants and unlimited resources.
3. Which one of the following is true?
A. Wants are limited and resources are unlimited.
B. Wants are unlimited and resources are limited.
C. Wants are limited and resources are limited.
D. Wants are unlimited and resources are unlimited.
4. Which one of the following is an example of free goods?
A. Free food offered to poor people. B. Free traveling.
C. Free meal in a restaurant. D. air
5. What is the term used to describe a situation whereby a student is unable to buy a school bag because he has bought an account textbook?
B. Opportunity cost.
C. Social cost.
6. How can the term “opportunity cost” be defined?
A. The next best opportunity to buy a product.
B. The next best alternative forgone.
C. The next best alternative forgone.
D. The next best opportunity to sell a product.
7. What is the main objective of production?
A. To satisfy human wants.
B. To help management.
C. To help the government in controlling the economy.
D. To provide free goods.
8. A carpenter works five 9-hour days each week and produces wooden bowls at a rate of 2 per hour. What is the opportunity cost of taking a holiday on a working day?
C. 2 bowls
D. 18 bowls
9. The need to make choice arises because
A. wants are limited
B. resources are limited
C. resources to satisfy our wants are scarce
D. goods and services are unlimited
10. The basic economic problems of any economy are
A. what to produce
B. what and how to produce
C. for whom to produce
D. what, how and fro whom to produce
11. Resources are also known as
A. consumer goods
B. public goods
D. factors of production
12. Which of the following choices would be classed as part of the basic economic problem?
A. To have public rather than private ownership of industry.
B. To use direct taxes rather than indirect taxes
C. To use fiscal rather than monetary policy
D. To use land for industry rather than agriculture.
13. A student leaves school and decides to spend the next two years at a college improving her qualifications. What is the opportunity cost for improving her qualifications for the next two years?
A. The extra money she will earn as a result of her improved qualifications
B. The money she would have earned if she had been in work for the two years.
C. The increase in job opportunities she will have as a result of her extra qualifications.
D. The lost production due to her not being in work.
E. The cost of the course fees at the college.
14. An artist works five 8-hour days each week and produces greeting cards at the rate of 150 per hour. She sells the cards for 110 cents each. What is the opportunity cost of taking a holiday on a working day?
A.10 cents B. 150 cents C. 150 cards
D. 1200 cards E. 6000 cards.
15. Which of the following describes the opportunity cost to society of building a new school?
A. The money spend on building the school
B. The increase in taxation to pay for the school
C. The extra cost of producing equipment and teachers to run the school efficiently.
D. The goods and services that could have been produced instead of the school.
16. Commercial companies are cutting tropical rain forests for hardwood timber. What is the opportunity cost to society of this activity?
A. The revenue from the sale of the timber
B. The natural habitat that is lost.
C. The products made from the timber
D. The value of the land cleared of timber
E. The profits of the companies
17. A housewife knits 5 baby garments a day. What is the opportunity cost if she stops knitting for two days and bakes bread instead?
A. Ten garments
B. The cost of the flour for the bread.
C. The cost of the wool she would have used.
D. The value of the bread produced.
18. Which combination of features describes the basic economic problem?
Factors of production Wants
A. Limited Limited
B. Limited Unlimited
C. Unlimited Limited
D. Unlimited Unlimited
19. A person makes sandwiches at home for five hours each day. She makes 20 sandwiches per hour, which she sells for $2 each. What is the opportunity cost if she takes a holiday on a working day?
A. $2 B. $40 C. 20 sandwiches D. 100 sandwiches
20. When economist says that something is scare; what does it mean to them?
A) Some thing is rare
B) Something is available very small quantity
C) Something is available enough quantity
D) Not enough quantity available to satisfy everyone’s wants
21. Which of the following can be considered as free goods but not as economic goods?
A) ice B) sand C) air D) sunshine
22. Which of the following is correct about free goods?
A) They can be obtained without sacrificing something
B) Sacrificing is must to obtain these goods
C) They have less cost of production
D) The production of these goods uses up scarce resources
23. We make choice because we have:
A) Unlimited wants and limited resources
B) Limited resources and limited wants
C) Unlimited wants and unlimited resources
D) Unlimited resources and limited wants
24. The principal of your school awarded you a cap for your outstanding performance in G.C.E ‘O’ level examination. Here the ‘cap’ is not considered as free good because.
A) It is freely available to you
B) It does not have opportunity cost
C) Zero price does not mean zero cost
D) It is not limited in supply
25. Scarcity is a feature of:
A) poor society only
B) rich society only
C) all societies
D) developed society
26. Which of the following goods does not require resources to produce them?
A) Economic goods
B) Free goods
C) Merit goods
D) Social goods
27. The total quantity of goods and services produced in any country is:
A) determined by the labour force
B) sufficient to satisfy people’s need
C) unlimited in supply
D) less than what people want
28. Economic problem arises because:
A) wants are unlimited
B) resources are scarce
C) scarce resources have limited uses
D) a particular want is satiable
29. Charles wants to buy either a pen or an apple with all his pocket money. He does not like either a chocolate or an orange .If he decides to buy a pen, and then the opportunity cost of it is:
A) an orange
B) an apple
C) a chocolate
D) none of the above
1. Define the economic problem?
2. What is scarcity?
3. Explain opportunity cost?
4. What are the durable consumer goods?
4. What are the non-durable consumer goods?
5. Write the difference between needs and wants?
6. What are economic goods?
7. What is utility?
8. Distinguish between free goods and economic goods?
9. What do you mean by an exchange?
10. Who is a consumer?
Cross Word Puzzle: