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THE ECONOMIC PROBLEM

THE ECONOMIC PROBLEM. What is the economic problem? The problem of deciding or choosing how to satisfy unlimited wants with limited resources. This is also often used as a definition for Economics. However, the Economic Problem can also be expressed in the form of 3 basic questions.

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THE ECONOMIC PROBLEM

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  1. THE ECONOMIC PROBLEM What is the economic problem? • The problem of deciding or choosing how to satisfy unlimited wants with limited resources. • This is also often used as a definition for Economics. • However, the Economic Problem can also be expressed in the form of 3 basic questions.

  2. SOLVING THE ECONOMIC PROBLEM Every society must answer the following three questions • What goods and services are to be produced and in what quantities? • How are those goods and services to be produced? • Who will receive and consume those goods and services?

  3. SOLVING THE ECONOMIC PROBLEM What to Produce • In the US Economy this is determined by consumers. • While most production is undertaken by private firms (or entrepreneurs) firms are dependent on the public to purchase these goods. • If firms overproduce, they may be forced to sell off surplus stock at below cost. • Underproduction will also result in a failure to maximise profit.

  4. SOLVING THE ECONOMIC PROBLEM How to Produce This may be decided by a business person, by the government or according to tradition. Examples • Motor vehicles can be made using an assembly line technique or a single unit method of construction. • Aluminum Cans can be spun, stamped, extruded or moulded.

  5. SOLVING THE ECONOMIC PROBLEM How to Produce (continued) • The production method will be decided by the entrepreneurs, who will generally be looking for the lowest cost method in relation to size and quality of their output. Government Influence on How Item is Produced • Safety regulations concerning machinery • Health regulations with food production. • Content regulations with regard to the origin of different parts of a product. (Eg: Cannot say a good is Australian made, if it uses 90% of material from Indonesia and 10% from Australia)

  6. SOLVING THE ECONOMIC PROBLEM Who will Receive and Consume the Goods and Services The basic factor that determines the share of total production each person receives is: Income (wages - as a return on labour) Rent (as a return on land & buildings) Interest (as a return on capital) Profit (as a reward for taking risks in the production process)

  7. SOLVING THE ECONOMIC PROBLEM Who will Receive & Consume the Goods and Services (continued) Governments take a large fraction of gross Income through various forms of taxation. The government income is used partly to provide community goods and services for the general welfare of society and partly to pay for various social services such as pensions and unemployment benefits.

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