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The Economic Problem
The central purpose of economic activity is to combine resources to
produce goods and services, which meet our needs and wants.
Needs are things we need to stay alive, such as water, food and
clothing. Our wants are never ending and we do not need them in order
to survive.
The resources we use to produce goods and services are in unlimited
supply. Collectively we call these resources factors of production. They
are divided into four groups:
Land – the natural resources used to produce goods and services
Labour - the human input into the production process
Capital - money
Enterprise – the person who is risking their ideas and money
The basic economic problem exists because we have infinite wants and
scarce resources.
Due to the economic problem we have to make choices. We call these
choices opportunity costs. This means the next best alternative
foregone when making a choice i.e. it is what we gain when making a
choice.