1.1 The nature of the economic problem

Chapter Objective:

By the end of this chapter, you will be able to able to:

 > understand the nature of the economic problem

 > explain finite resources and unlimited wants

 > distinguish between economic and free goods.

Economic Agents

In an economy, in general, there are three main economic agents (or decision makers). 
Economic agents are individuals, groups, or entities that participate in economic activities. They are the key players in an economy, making decisions and taking actions that influence the production, consumption, and distribution of goods and services

Three basic economic questions.

Economic agents make decisions and choices with the objective of dealing with the three basic economic questions faced by all societies, which are:

Needs, Wants, Bads

Everyone has needs.  Needs are the essential goods and services required for human survival. These include nutritional food, clean water, shelter, protection, clothing and access to healthcare and education. All individuals have a right to have these needs met and this is stated in Articles 25 and 26 of the United Nations Universal Declaration of Human Rights, drafted in December 1948.

Wants are goods and services that are not necessary for survival but are human desires — that is, things we would like to have. Wants are unlimited as most people are rarely satisfied with what they have and are always striving for more. Wants are a matter of personal choice and part of human nature.

World Bank figures suggest that over 3 billion of the world’s inhabitants live on less than $2.50 per day and more than 1.3 billion live in extreme poverty (less than $1.25 a day). These fi gures suggest that their basic needs are not being met. In contrast, the ten richest people on the planet have wealth equivalent to the poorest half of the world’s population. The study of economics can help to explain why this happens and offer possible solutions to the basic economic problem.

Economic goods and free goods

In general, all goods can be classified into 2 key types. Economics goods and free goods.

An economic good is one which is limited in supply, such as oil, wheat, cotton, housing and cars. It is scarce in relation to the demand for the product, so human effort is required to obtain an economic good.

Free goods are unlimited in supply, such as the air in the atmosphere, seawater, and sunlight.  There is no need to give up on anything in the production or consumption of free goods.

A free good is not the same as a good that is provided without having to pay (such as education or healthcare services provided by the government). The latter has an involves choices and giving up on something else (the money could have been spent on the provision of other goods and services) and is funded by taxpayers’ money.

Chapter Review Questions