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Basic Economic Problem


Investigate the complexity of the economic problem and apply economic decision-making tools and processes to deal with the problem

Course Overview

Topic 3 Goals

  • Define and explain what a want is
  • Identify, describe, and explain the characteristics of a want
  • Differentiate between wants and needs
  • Explain with example why making a choice involves an opportunity cost
  • Calculate opportunity cost using a PPC (Production Possibility Curve)
  • Define and explain what the Economic method is
  • Apply economic methods to solve economic problems (Simulation Game)

Course Content

4 Lessons 4h 40m

    Key Definitions:

    • Wants: things we desire because they give us satisfaction.
    • Needs: things that are essential for life our society
    • Ceteris paribus assumption: a Latin phrase that means ‘other things being equal’
    • Opportunity cost: the best alterative opportunity forgone when a choice is made
      What are the origins of wants:
    • Biological conditions
    • Income
    • Peer pressure
    • Advertising
    • Climate
    • Geographical location
    What are the characteristics of wants

    Satisfaction of one want generates a new want

    Wants vary by person, time, and place

    Some wants are recurring or complimentary

    Wants vary with age, gender, and time

    Wants have opportunity costs

    Wants are habitual


    The PPC is an example of an economic model. Economists use economic models to attempt to explain concepts and economic relationships.
    In doing this, they make assumptions about parts of the model, thereby simplifying the model.
    To move production beyond the frontier, the economy would need to find additional resources to use (increase in labour force or an increase in capital to make workers more productive). Alternatively, a change in technology available might be achieved.
    The alternative choices on the PPC e.g., Point A v Point E represent the opportunity costs of choosing different levels of production. By moving from the two points, one sacrifices 200 units of rice and 10 units of coffee for 0 units of rice and 80 units of coffee.
    To produce rice at point A, we lose 80 units of coffee, and we gained 200 units of rice. Therefore, 80/200 = 0.4 means that for every 1 unit of rice that is produced, we sacrifice 2.5 units of coffee or 0.4 units of coffee.

      The PPC for an economy is seldom, if ever, stable. It is constantly changing due to changes in conditions in the economy, such as the following examples:
    • Improvements in the health of the population may result in an increase in the number of workers available for work, and a reduced amount of leave
    • Increased levels of education among the population would be expected to increase productivity of workers and increase the among of skills and knowledge within the economy
    • >Labour can become more productive due to health improvements, level of education, new ways of doing tasks, moving to more capital-and technology-based production methods

    Such factors (or their opposites) may shift the PPC to the right (left) and thereby expand (contract) the economy.

    There are different types of benefits/costs attached to choices made by individuals, societies, organisations, and countries:

      What are the factors determining how resources are allocated in PNG?

    • Private cost: cost that are accrued (added) to and paid by the individual economic decision maker
    • Private benefits: benefits that are accrued to and enjoyed by the individual economic decision maker
    • Social cost: costs that are accrued to and paid by the society as a whole
    • Social benefits: benefits that are accrued to an enjoyed by the society as a whole
    • The economic rule in the economic states that:

      • 1. If the cost is greater than the benefit; don’t do it
      • 2. If the benefit is greater than the cost, do it

      The Economic Method Steps:

      • Identify and list down all the private and social cost and benefits for the society and the firm for a year
      • Identify if the costs are greater than the benefits or benefits greater than the cost
      • Identify and see
      • Economic decision making takes place

    A want is the desire to consume a good/service to get satisfaction or things that we would like to have but are not necessary – we can live without them

    Needs are things that we must have to survive, they are necessary

    When we make an economic choice/decision we are faced with a cost of making that choice. Therefore, the economic decision that you make to carry out the choice must make full/efficient use of the resources which gives maximum benefit and minimal cost

    When a set of resources is used to produce a good/service, alternative goods/services which can be produced with the same set of resources must be give up or scarified. The alternative became the opportunity cost of the choices you have made

    A production possibility curve (PPC) is an economic model which tries to simplify the real-world situation by making the following assumptions:

    • 1. The economy produces only two goods
    • 2. All resources are fully employed, and none is wasted
    • 3. The state of technology is fixed and is producing at its maximum capacity
    • 4. The supply of available resources is fixed
    • A PPC is an economic model that shows the production ability of a firm in producing a combination of two alternative goods with a fixed amount of inputs

    The main application of the PPC model is to highlight some of the basic economic concerns of:

    • Choice and opportunity costs
    • The effects of unemployed and employed resources on potential output (production)
    • The effect of improved technology on output (production)

    The optimum point of production is the point of production where resources are not seen to be under used/wasted