AS A Level Business: The Economic Problem

As already said elsewhere, business involves an organised effort
The owners combine factors of production to achieve set objectives
Combining factors of production can also be known carrying out an economic activity
Businesses exist primarily to satisfy human needs and wants
Needs are those things that human beings require in order to survive e.g. water, shelter, clothes and food
Needs are finite i.e. they can be counted
Humans cannot survive if their needs are not met
It is necessary for needs to be met in order for life to continue
Wants are those things that are required by humans to make life more comfortable for example a couch, Television, cellphone etc
Wants are infinite (uncountable) i.e they are unlimited
Humans can survive even if their wants are not met
Wants are luxuries humans desire to live comfortable lives
Needs and wants when combined are unlimited
On the other hand, resources are required in order to satisfy needs and wants
Resources is another name for the factors of production:
- Capital
- Enterprise
- Land
- Labour
Resources are used as inputs in the production process
The end result (output) are products (goods and services)
These products are used to satisfy human needs and wants
Resources, unlike needs and wants, are limited (finite)
This is known as scarcity
We say resources are scarce while needs and wants are unlimited
As already said this presents a problem and leads to the following:
Choice
Opportunity Cost
The Economic Problem

Since every need and want can be fulfilled because resources are limited
People (consumers, government, customers, producers) have to decide which needs and wants they want to satisfy
Choice involves deciding between two or more alternatives

Whatever choice they make it means not all needs and wants will be satisfied
Opportunity cost refers to the cost of foregoing the next best alternatives
It refers to the benefit, profit, or value that the person making the choice would have enjoyed had they not made the current choice
Making the current choice means that they have passed on the benefits, profit or value they would have enjoyed had they made a different choice
For example, if you have $10 which would just enough to buy a movie ticket or enjoy a restaurant meal but not enough for both
If you decide to watch the movie then the restaurant meal becomes your opportunity cost
It means while you are enjoying the movie you are not enjoying the meal what you would otherwise be enjoying
Almost every business (even personal) decision comes with opportunity cost

The problem of limited resources versus unlimited needs and wants does not just apply to individuals and businesses
It applies to communities, towns, states, provinces and countries as a whole
These have limited resources too, for example, foreign currency is limited
The economic problem refers to the issue faced by society of how to make the best use of limited, or scarce, resources
Society has to decide on how these resources are to be allocated
The economic problem involves three questions that society must answer:
1. What to produce-society has to decide what combination of goods and services to produce so as to satisfy their needs and wants. For example how much arable land to set aside for food crops versus commercial crops?
2. How to produce-Societies also have to decide the best combination of factors to create the desired output of goods and services. For example, how much land, labour, and capital should be used to produce essentials such as grain
3. For whom to produce-all societies need to decide who will get the output from the country’s economic activity, and how much they will get
Economic systems are used to solve this problem
There are three general economic systems and each given society can choose one they prefer depending on the different political set up of the given society
The three economic systems are:
1. The planned economic system
2. The free market economic system
3. The mixed economic system