Answer to Question # 1

Economic Resources

1. Microeconomics is the study of the behavior and decisions of

individuals and businesses in markets across the economy. We start our
study of microeconomics by looking at the resources which an economy
may have available to supply and produce goods and services to meet the
ever-changing needs and wants of individuals and society as a whole.

2. In economics we classify goods as “tangible” products, example

might include food and drink, cars, digital televisions, flat-screen
televisions, energy products and cricket bats! Services are sometimes
known as intangibles, education and health-care are two important services
and tourism, business consultancy, cleaning and home insurance are all
examples of services.

Finite resources

3. There are only a finite (or limited) number of workers, machines,

acres of land and reserves of oil and other natural resources on the earth.
Because most of our resources are finite, we cannot produce an unlimited
number of different goods and services and by producing more for an ever-
increasing population we are in real danger of destroying the natural
resources of the planet. This has important consequences for the long-term
sustainability of economies throughout the world and potentially huge
implications for our living standards and the quality of life.

Factors of production

4. Factors of production refer to the resources we have available to

produce goods and services. We make a distinction between physical and
human resources.

a. Land . Land includes all of the natural physical resources –

for example the ability to exploit fertile farm land, the benefits
from a temperate climate or the ability to harness wind and
solar power and other forms of renewable energy. Some
nations are richly endowed with natural resources and then
specialize in the extraction and production of these resources,
 b. Labour. Labour is the human input into the production
process. It is inevitable that some workers are more productive
than others because of the education, training and work
experience they have received. What matters is the size and
quality of the workforce. An increase in the size and the quality
of the labour force is vital if a country wants to achieve
economic growth.

c. Capital. To an economist, investment is not the money that

people put into the stock market or into bank and building
society accounts. Instead, in economics the term capital means
investment in capital goods that can then be used to produce
other consumer goods and services in the future.

(1) Fixed capital includes machinery, plant and equipment,

new technology, factories and other buildings.

(2) Working capital refers to stocks of finished and semi-

finished goods (or components) that will be either
consumed in the near future or will be made into finished
consumer goods.

d. Infrastructure. Infrastructure is the stock of capital used to

support the entire economic system. Examples of infrastructure
include road & rail networks; airports & docks;
telecommunications e.g. cables and satellites to enable web
access. The World Bank regards infrastructure as an essential
pillar for economic growth in developing countries.

e. Entrepreneurship. An entrepreneur is an individual who

seeks to supply products to a market for a rate of return (i.e. to
make a profit). Entrepreneurs will usually invest their own
financial capital in a business (for example their savings) and
take on the risks associated with a business investment. The
reward to this risk-taking is the profit made from running the
business.

5. Renewable resources. Renewable resources are commodities

such as solar energy, oxygen, biomass, fish stocks or forestry that is
inexhaustible or replaceable by new growth providing that the rate of
extraction of the resource is less than the natural rate at which the resource
renews itself. This is becoming an enormously important issue in
environmental economics, for example the issue of the over-extraction of
fish stocks, and the global risks of permanent water shortages resulting
from rising use of ground water stocks. Finite resources cannot be
renewed. For example with plastics, crude oil, coal, natural gas and other
items produced from fossil fuels, no mechanisms exist replenish them.

LINK BETWEEN SCARCITY, CHOICE AND OPPORTUNITY COST

6. The purpose of economic activity

a. Road space throughout the world is becoming increasingly

scarce as the demand for motor transport increases each year
– what do you think are some of the best solutions to reducing
the problem of congestion on our roads?

b. It is often said that the central purpose of economic activity is

the production of goods and services to satisfy consumer’s
needs and wants i.e. to meet people’s need for consumption
both as a means of survival but also to meet their ever-growing
demand for an improved lifestyle or standard of living.

c. The basic economic problem is about scarcity and choice since

there are only a limited amount of resources available to
produce the unlimited amount of goods and services we desire.

7. All societies face the problem of having to decide:

a. What goods and services to produce: Does the economy uses

its resources to operate more hospitals or hotels? Do we make
iPod Nanos or produce more coffee? Does the National Health
Service provide free IVF treatment for thousands of childless
couples? Or, do we choose instead to allocate millions of
pounds each year to providing beta-interferon to sufferers of
multiple sclerosis?

b. How best to produce goods and services: What is the best use
of our scarce resources of land labour and capital? Should
 school playing fields be sold off to provide more land for
affordable housing? Or are we contributing to the problem of
obesity by selling off these playing fields?

c. Who is to receive goods and services: What is the best method

of distributing products to ensure the highest level of wants and
needs are met? Who will get expensive hospital treatment - and
who not? Should there be a minimum wage? If so, at what level
should it be set?

8. If something is scarce - it will have a market value. If the

supply of a good or service is low, the market price will rise, providing there
is sufficient demand from consumers. Goods and services that are in
plentiful supply will have a lower market value because supply can easily
meet the demand from consumers. Whenever there is excess supply in a
market, we expect to see prices falling. For example, the prices of new cars
in the UK have been falling for several years and there have been huge
falls in the prices of clothing as supply from countries such as China and
Vietnam has surged.

9. Insatiable human wants and needs.

a. Human beings want better food; housing; transport, education

and health services. They demand the latest digital technology,
more meals out at restaurants, more frequent overseas travel,
more leisure time, better cars, cheaper food and a wider range
of cosmetic health care treatments.

b. Opinion polls consistently show that the majority of the

electorate expects government policies to deliver improvements
in the standard of education, the National Health Service and
our transport system. (Whether voters are really prepared to
pay for these services through higher taxes is of course another
question!)

c. Economic resources are limited, but human needs and wants

are infinite. Indeed the development of society can be
described as the uncovering of new wants and needs - which
 producers attempt to supply by using the available factors of
production.

10. Making choices

a. Because of scarcity, choices have to be made on a daily basis

by all consumers, firms and governments. For a moment, just
have a think about the hundreds of millions of decisions that are
made by people in your own country every single day.

b. Take for example the choices that people make in the city of
London about how to get to work. Over six million people travel
into London each day, they have to make choices about when
to travel, whether to use the bus, the tube, to walk or cycle – or
indeed whether to work from home. Millions of decisions are
being taken, many of them are habitual.(

11. Trade-offs when making choices. Making a choice made

normally involves a trade-off - in simple terms, choosing more of one thing
means giving up something else in exchange. Because wants are unlimited
but resources are finite, choice is an unavoidable issue in economics. For
example:

a. Housing: Choices about whether to rent or buy a home – a

huge decision to make and one full of uncertainty given the
recent volatility in the British housing market! There are costs
and benefits to renting a property or choosing to buy a home
with a mortgage. Both decisions involve a degree of risk.

b. Working: Choosing between full-time or part-time work, or to

take a course in higher education lasting three years – how
have these choices and commitments been affected by the
introduction of university tuition fees?

c. Transport and travel: The choice between using Euro-Tunnel,

a speedy low-cost ferry or an airline when travelling to Western
Europe. Your choices about which modes of transport to use to
get to and from work or school each day.

12. Opportunity Cost

a. There is a well known saying in economics that “there is no
such thing as a free lunch!” Even if we are not asked to pay a
price for consuming a good or a service, scarce resources are
used up in the production of it and there must be an opportunity
cost involved.

b. Opportunity cost measures the cost of any choice in terms of

the next best alternative foregone. Many examples exist for
individuals, firms and the government.

(1) Work-leisure choices: The opportunity cost of

deciding not to work an extra ten hours a week is the lost
wages foregone. If you are being paid £6 per hour to
work at the local supermarket, if you choose to take a day
off from work you might lose £48 from having sacrificed
eight hours of paid work.

(2) Government spending priorities: The opportunity

cost of the government spending nearly £10 billion on
investment in National Health Service might be that £10
billion less is available for spending on education or the
transport network.

(3) Investing today for consumption tomorrow: The

opportunity cost of an economy investing resources in
new capital goods is the current production of consumer
goods given up. We may have to accept lower living
standards now, to accumulate increased capital
equipment so that long run living standards can improve.

(4) Making use of scarce farming land: The opportunity

cost of using arable farmland to produce wheat is that the
land cannot be used in that production period to harvest
potatoes.