IGCSE Economics Notes

The basic economic problem is the persistent issue of how to allocate limited resources to fulfill the unlimited and diverse human wants and needs, resulting in the necessity to make choices and trade-offs among competing alternatives.

Scarcity of Resources

• Limited availability of essential resources like land, labor, and capital.

• Example: A country has a fixed amount of arable land for agriculture, a limited workforce, and a constrained amount of available funds for investment.

The challenge of fulfilling unlimited human wants with finite resources.

• Example: People have diverse wants such as food, clothing, housing, education, entertainment, etc., but resources are insufficient to satisfy all of them fully.

Individuals, households, businesses, and governments that participate in economic activity by making decisions and performing actions connected to the production, consumption, and distribution of goods and services are referred to as economic agents. These agents are critical to an economy's functioning because they interact with one another to allocate resources, exchange products and services, and decide overall economic outcomes.

Individuals and Households

• Consumers of goods and services.

• Allocate income to satisfy wants and needs.

• Example: A person spends their income on groceries and entertainment.

Businesses and Firms

• Producers of goods and services.

• Make decisions on production, pricing, and investment.

• Example: A company lowers the price of its product to attract more customers.

Governments

• Intervene through policies and regulations.

• Provide public goods and services.

• Example: The government implements tax incentives for renewable energy investment.

The three basic economic questions are fundamental queries that every economic system must address to allocate resources efficiently and determine the production and distribution of goods and services.

What to produce?

• This question pertains to the allocation of scarce resources to produce different goods and services. It involves deciding which goods and services are to be produced and in what quantities to meet the needs and wants of the population.

• For example, a country may decide to allocate resources to produce more healthcare services, education, and renewable energy to address social and environmental needs.

How to produce?

• This question focuses on the choice of production methods and technologies used to manufacture goods and deliver services. It involves determining the most efficient and cost-effective ways to produce output.

• For instance, a company may choose between labor-intensive or capital-intensive production methods based on factors like labor costs and technological advancements.

For whom to produce?

• It involves deciding who gets to consume the output and in what proportions.

• For example, an economy may prioritize equitable distribution, ensuring that basic necessities are accessible to all citizens. 

Economic goods 

• Economic goods are tangible or intangible products or services that have a monetary value and are considered scarce relative to human wants and needs. These goods are the subject of economic activity as they are produced, distributed, and consumed to satisfy human desires.

•  Example -Goods like smartphones, laptops, and televisions are economic goods due to their monetary value and limited availability.

Free goods

• Free goods are resources or commodities that are naturally abundant and do not have a monetary cost associated with them. These goods are not scarce, meaning their supply is plentiful relative to human wants, and they are available without any payment or price attached. Free goods are not subject to economic scarcity or the need for resource allocation, as they are available in abundance.

• Example -Sunlight is freely available to all and provides light and heat without any monetary charge.