The Economic Problem
The basic economic problem is how best to allocate scarce resources
to satisfy unlimited wants.
• Every economy faces scarcity because resources (land, labour,
capital, enterprise) are limited while human wants are infinite.
• This fundamental issue drives all economic decisions made by
households, firms, and governments.
The diagram shows how unlimited wants collide with limited
resources, producing the condition of scarcity that underlies the
economic problem.
Economic Agents & the Three Fundamental Questions
Economic agents are the decision-makers in an economy:
• Households (private individuals)
• Firms (private-sector businesses)
• Government (public sector)
The three basic questions each agent must answer:
1. What to produce?
2. How to produce it?
3. For whom to produce it?
Example: A private firm that makes running shoes must decide which
models to offer (what), which production techniques to use (how),
and which market segments to target (for whom).
Needs vs. Wants
Needs are goods and services essential for survival (food, water,
shelter, health care, education).
Wants are non-essential items that satisfy desires (luxury goods,
entertainment).
• Needs are protected by Articles 25 and 26 of the UN Universal
Declaration of Human Rights.
• Wants are unlimited; most people are never fully satisfied.
Category Examples Human Motivation
Nutritious food, clean water,
Survival & basic
Needs housing, basic health care,
well-being
primary education
Designer clothing, smartphones, Desire for higher living
Wants vacations, premium streaming standards & personal
services satisfaction
Goods vs. Services
Goods are tangible items that can be produced, bought, and sold
(e.g., furniture, clothing, toothpaste).
Services are intangible activities provided for a fee (e.g., haircuts, bus
journeys, education, internet access).
• Both are produced and consumed by all economic agents.
Economic Goods vs. Free Goods
Economic goods are scarce; their production requires effort and they
have an opportunity cost (e.g., oil, wheat, machinery).
Free goods are abundant and have no opportunity cost (e.g., air,
seawater, sunlight).
Economic Good Reason for Scarcity Typical Reward
Oil Limited reserves Rent/Profit
Wheat Seasonal yield limits Wages (farm labor)
Capital machinery High production cost Interest
Free Good Why Unlimited Opportunity Cost
Air Naturally abundant None
Seawater Vast oceans None
Sunlight Continuous solar output None
Factors of Production
The factors of production are the inputs required to create goods
and services: Land, Labour, Capital, and Enterprise.
Each photograph represents one of the four factors: land
(agriculture), labour (construction), capital (industry), and enterprise
(business ownership).
Factor Description Typical Example
Natural resources (oil, water, Sugar cane fields for
Land
minerals, agricultural land) Coca-Cola
Human effort, skilled or
Labour Assembly-line workers
unskilled
Manufactured inputs
Capital Bottling plant machinery
(machines, tools, buildings)
Entrepreneurial ability to Risk-taking manager who
Enterprise
combine the other three launches a new drink line
Study tip: The first letters spell C E L L, a handy mnemonic.
Rewards for the Factors of Production
Factor Reward (Income) Description
Land Rent Payment for use of natural resources
Labour Wages & Salaries Compensation for time and effort
Capital Interest Return on borrowed or invested funds
Enterprise Profit Surplus after all other costs are paid
Collectively, these rewards constitute national income.
Mobility of Factors of Production
Geographical Mobility
• Definition: Ability of labour (and other factors) to relocate for
work.
• Influences: family ties, education of children, cost of living
differences, relocation allowances.
Occupational Mobility
• Definition: Ease with which workers can switch occupations
after retraining.
• Higher occupational mobility → more adaptable, competitive
economies.
Opportunity Cost
Opportunity cost is the value of the next best alternative forgone
when a decision is made.
• Every choice entails an opportunity cost because resources
could be used elsewhere.
• Example: Choosing to spend $100 on a concert means the same
$100 cannot be saved or used to buy a new textbook.
Production Possibility Curve (PPC)
The PPC shows the maximum feasible output combinations of two
goods or services given existing resources and technology.
Key Concepts
• Points on the curve = efficient production (full employment of
resources).
• Points inside the curve = underutilisation (idle resources).
• Points outside the curve = unattainable with current resources.
The graph illustrates trade-offs: moving from point A (all furniture) to
point C (more olive oil) forces a reduction in furniture—this loss is the
opportunity cost.
Movements & Shifts
• Movement along the curve – change in the mix of two goods;
each move entails an opportunity cost.
Shifting from X to Y produces more consumer goods but fewer
producer goods.
• Outward shift – growth in resources or technology expands the
economy’s capacity.
The arrow shows the PPC moving outward, representing higher
productive capacity.
• Inward shift – loss of resources or disasters reduces capacity.
An inward move signals fewer goods/services can be produced after a
shock (e.g., natural disaster).
Example Table: Opportunity Cost on a PPC
Good
Move Good Lost Opportunity Cost
Gained
A → C (furniture → +20 L olive –5 t 5 t furniture per 20 L
olive oil) oil furniture oil
X → Y (consumer +30 units –15 units 15 units producer per
→ producer goods) consumer producer 30 units consumer
Exam-Style Questions
1. Basic Economic Problem
o What is the fundamental economic problem faced by all
societies?
2. Free Good Identification
o Which of the following is most likely a free good?
▪ A) Birthday presents
▪ B) Public transportation
▪ C) Seawater
▪ D) State-funded education
3. Opportunity Cost Calculation
o A farmer can produce either 65 units of corn or 30 units of
wheat, or a mix of both. If he chooses to produce 55 units
of corn, what is the opportunity cost in wheat?
4. PPC Interpretation (Country Y)
o If Country Y moves from point B to point D on the
wheat-barley PPC, what is the opportunity cost?
5. Mobility Concept
o Explain why miners are considered occupationally
immobile, using the mining-truck image as a reference.
The economic problem results in choices and opportunity cost.
People have to decide what job to do and where to live. In recent
years Australia has recruited teachers from a number of countries
including Canada, the UK and the US. Most of these teachers
specialise in a single subject.
c) Explain the economic problem and why it is always likely to exist.
[4]
Canada’s private sector firms have a number of different objectives.
The quantity and quality of land used by these firms, including farms,
has increased. There has also been increased investment with the
firms buying more capital goods. In 2021, the Canadian government
encouraged higher investment and aimed to prevent a rise in
unemployment.
c) Explain one reason why the quantity of land may increase and one
reason why the quality of land may increase. [4]
Washington State is the state which grows the most apples in the US.
In 2019, apple production increased in Washington State but the
market was in disequilibrium. Apple farming is a labour intensive
industry because apples are picked by hand. The market for apples in
the US is competitive.
c) Explain opportunity cost and how it can influence a farmer’s
decision to grow apples. [4]
In 2020, Singapore experienced a decrease in both its population size
and its labour force. 2020 was a year of great change in a number of
Singaporean markets. Some moved from disequilibrium to
equilibrium. Despite all these changes, Singapore managed to
increase its exports of goods and services.
c) Analyse, using a production possibility curve (PPC) diagram, the
effect of a decrease in the size of a country’s labour force on its
economy. [6]
