Collins Cambridge IGCSE Economics Sample Page

The basic economic problem

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In this first chapter you will learn some of the underlying, fundamental ideas and concepts that form the basis of the study of economics.

You will begin by exploring the nature of the economic problem and the fact that resources are scarce. You will then look in more detail at the nature of the economic resources available for production. Finally, you will develop your understanding by looking at choices and opportunity cost. These are illustrated using a production possibility curve, and you will explore the significance and interpretation of these diagrams.

1.1 The nature of the economic problem 1.2 The factors of production 1.3 Opportunity cost 1.4 Production possibility curve diagram (PPC)

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Chapter 1 . Unit 1

The nature of the economic problem Learning objectives By the end of this unit, you should be able to: • define what is meant by finite resources • explain what is meant by unlimited wants • give examples of the economic problem in different contexts • explain the difference between an economic good and a free good.

Starting point Complete these tasks in pairs: 1

Write a list of five goods or services you need to survive.

2

Now write a list of 10 goods or services you would buy if you won $500.

3

Explain why you can’t have all 10 goods or services.

Exploring

Discuss these questions in pairs: 1

What materials do you need to make a car?

2

Will any of the resources you listed in question 1 eventually run out?

3

Will any of the resources you listed in question 1 always be available in the future?

4

Why are some resources likely to be available in the future whereas other resources are likely to run out?

5

What can be done to make resources last longer and not run out as quickly?

Developing Finite resources and unlimited wants Everyone has basic needs to survive, such as food, clean water and shelter. However, all people will have a never-ending list of goods or services they want – such as cars, fashionable clothes and holidays. What is the difference between a need and a want?

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Key term Basic needs – what is needed for survival, such as food, shelter, water and clothing

Chapter 1: The basic economic problem

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1.2 enterprise there would be no production. Enterprise is carried out by the entrepreneur, and the reward gained by the entrepreneur is profit.

Labour

Capital

Factory and office workers

Ice-cream mixing machines and factory building Ice-cream factory

Land

Enterprise

Land on which the factory is built and the raw materials, such as milk, used to produce the ice-cream

Entrepreneur who set up the factory

Figure 1.2.1 Factors of production for an ice-cream factory Key knowledge

Mobility of factors of production 1

What happens to the factors of production when a business closes?

Land

Natural resources

2

Can the factors of production be sold and transferred to another industry?

Labour

Human resources

Capital

Manufactured resources

For some factors the answer to question 2 is yes, but for others it may be very difficult to sell and move them. A coal mine with machinery used to extract coal is probably not useful for any other industry. However, computer systems or factory buildings could be used in another industry and are therefore considered to be mobile.

Land can often be adapted for other uses and labour can often be retrained to carry out other jobs. Capital can be more difficult to move to an alternative use. The more specific the capital, the less mobile it is. For example, if machinery is made especially to carry out a particular purpose as part of the production process then it will probably not be able to be used for anything else. An example is a robot on a car production line that welds the car body together. Enterprise, on the other hand, can be moved to alternative industries if the entrepreneur has some knowledge of the alternative industry.

Enterprise Brings together all the other factors of production to produce goods and services Key term Mobility of factors of production – how easy or difficult it is for factors of production to be transferred to alternative industries

Unit 1.2: The factors of production

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Chapter 1 . Unit 3

Opportunity cost Learning objectives By the end of this unit, you should be able to: • define opportunity cost • give examples of opportunity cost in different contexts • explain how opportunity cost influences decision making by consumers, workers, producers and governments when allocating resources.

Starting point Answer these questions in pairs: 1

What is the economic problem?

2

Why can you not have all the goods you want?

Exploring Discuss these questions in pairs: 1

How do you decide which goods and services to buy and which ones not to buy?

2

Think of four things you would want to buy that cost approximately $5. Place these items in order of preference with the most preferred at the top (1) and the least preferred at the bottom (4). Explain why you would not buy the items ranked 2, 3 and 4.

Developing Opportunity cost In Unit 1.1 it was explained that there are not enough resources to provide goods and services to satisfy all the wants in an economy.

Wants are unlimited but the ability to satisfy these wants is limited due to resources being scarce, so choices have to be made. Much of what you will study in economics is about the choices behind using scarce resources to satisfy as many of these unlimited wants as possible.

Key term Opportunity cost – the next best alternative foregone when making an economic decision

When making a choice between wants, something has to be given up. This is known as opportunity cost. Opportunity cost is the next best alternative foregone when making a choice. It is a cost because it is something that has been given up in favour of the first choice.

For example, you have a birthday and you are given $50 to spend. You go to the shops and decide to buy either a new pair of jeans or a new jacket. You decide to buy the jacket – so what have you given up?

You have given up the jeans as they were the next best alternative foregone or, in other words, the alternative choice you decided to give up. So the opportunity cost of purchasing a new jacket is the pair of jeans that you didn’t buy.

Unit 1.3: Opportunity cost

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Can you think of other opportunity cost examples when you faced a choice and gave up buying something or doing something else instead?

Opportunity cost is not just relevant when you are buying goods or services. It can also apply when you choose between doing particular activities; a money cost is not always involved. You may have been asked by friends to go and play basketball while some other friends asked you to play tennis. If you choose to play basketball what have you foregone? You have given up playing tennis. So the opportunity cost of you choosing to play basketball is playing tennis because you have given up playing tennis.

The following table has examples of choices that have been made and the opportunity cost of these choices.

Choices: the alternatives to choose between

First choice

Opportunity cost: the next best alternative choice that has been given up

Consumer

Buy a new watch or buy concert tickets

Concert tickets

A watch

Worker

Work overtime or spend time with your children

Spend time with your children

Additional wages from working overtime

Producer

Increase advertising expenditure or increase training

Increase training

More advertising

Government

Pay higher pensions or higher wages for government employees

Higher pensions

Higher wages for government employees

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What might change to cause each of the items ranked as the next best alternative choice to be chosen instead?

CASE STUDY

Aldi – investment in staff leads to global growth

Aldi is a global discount supermarket chain. It has more than 8000 stores worldwide and continues to open new stores in Europe, North America and Australia. Aldi aims to provide its customers with high quality products at competitive prices. One of the ways it achieves this is by focusing on the training and development of its employees.

Aldi has spent some money advertising its brand in the UK as this is a very competitive market and it wants to increase its market share. In America it has a low number of employees in each store relative to other supermarkets.

1 What else could Aldi spend its money on instead of training and advertising?

2 What is the opportunity cost of Aldi choosing to invest in its employees?

3 Why do you think Aldi made this choice?

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Chapter 1: The basic economic problem

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Chapter 1 . Unit 4

Production possibility curve diagram (PPC) Learning objectives By the end of this unit, you should be able to: • define what is meant by a production possibility curve (PPC) • draw a production possibility curve • interpret a PPC diagram • explain the significance of the location of production points on the diagram • explain opportunity cost and movements along the PPC • explain the causes and consequences of shifts in the PPC in terms of an economy’s growth.

Starting point Answer these questions in pairs: 1

If a farmer had six fields and could grow either wheat or rice in the fields, which should the farmer grow?

2

What could affect which crop the farmer chooses to grow?

Exploring Discuss these questions in pairs: 1

A car company can manufacture two models of car in its factory. Should it manufacture only one model or should it manufacture some of both models?

2

What are your reasons for this choice?

Developing Production possibility curve The production possibility curve (PPC) shows in diagram form how much of two goods or services could be produced with a given amount of resources in a stated time period. It assumes that all the resources are used efficiently. As a diagram has only two axes, no more than two goods or services can be compared at any one time – one good or service goes on each axis. The PPC can be drawn as a curve or a straight line.

For example, a farmer has four fields and can grow only two crops on the land. If the farmer uses all the fields to grow only wheat then the output is 100 units of wheat and no rice. If the six fields are used to grow only rice and no wheat then the output is 200 units of rice.

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Key term Production possibility curve (PPC) – shows the maximum possible output for two goods or services with a given amount of resources

Chapter 1: The basic economic problem

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