The economic Problem:

The central purpose of economic activity is the production of goods and services to satisfy the needs and wants of consumers within a market. However, must do so with limited resources. Therefore, an economy must best allocate those resources to meet the needs and wants of the consumers through key economic decisions:

The key economic decisions are:

• What to produce,
• How to produce and;
• Who is to benefit from the goods and services produced?

The resources that are available are called factors of production and go into the production of all goods or services these are:

• Land – This is where the production or economic activity occurs
• Labour – This is any human or mechanical labour required in production
• Capital – This is any assets or economic resources required in production
• Enterprise – This is the entrepreneurship of the business owner

The fundamental economic problem is scarcity and it results from limited resources and unlimited wants from consumers, whilst having to maintain their needs. Scarcity means that choices have to be made about how scarce resources are allocated between different uses. Choices have an opportunity cost.

Any use of economic resources will have an opportunity cost:

• Land – Could the land be used for something else? hospital, school, factory etc.
• Labour – Could this be outsourced? Are they working at their potential?
• Capital – Holding cash vs T bonds, Investment decisions
• Enterprise – Could the entrepreneur be better suited to another industry?

This can be shown on a possibility production frontier: