1.1.1a Needs and wants

A need is essential, a want is not

1. Everyone shares the same short list of needs, but wants vary with taste, income and advertising.
2. One need can be met in many ways, and the choice between them is a want: you need to eat, but you want a takeaway rather than plain rice.
3. When money is tight, households cut wants before needs, because survival depends on needs.

Human wants are effectively unlimited

1. Human wants are effectively unlimited, because satisfying one want creates the next.
2. Buying a phone soon creates wants for a case, apps and the next model.
3. Higher incomes expand wants rather than use them up, so even the rich cannot satisfy them all.
4. Needs behave differently, because the list stays short however rich a person becomes.

Wants change as society gets richer

1. Wants are not fixed, because technology, fashion and living standards keep changing.
2. Nobody wanted a smartphone in 1990 because it did not exist, yet today it is one of the most common wants.
3. As a country grows richer, yesterday's luxuries such as foreign holidays and fast broadband become everyday wants.
4. Needs shift too, but far more slowly: an internet connection is now close to essential for schoolwork and job applications.
5. Because wants keep growing, the pressure they put on limited resources never goes away.

1.1.1b The central purpose of economic activity

Economic activity exists to satisfy needs and wants

1. Its central purpose is to produce the goods and services that satisfy people's needs and wants.
2. Production turns scarce resources into useful output.
3. Exchange moves that output to the people who want it, usually by buying and selling.
4. Consumption completes the process, because a good only satisfies a want once somebody uses it.

Profit is a motive, not the purpose

1. Firms such as Warburtons produce for profit, and the chance of profit tells them what is worth making.
2. Profit is how production gets organised, not why an economy produces at all.

Scarcity means some wants go unsatisfied

1. Resources are scarce and wants are unlimited, so no economy can satisfy every want at once.
2. Producing to meet wants therefore always means choosing what to make, how to make it and who receives it.
3. Answering those three questions well is what makes scarce resources go furthest, and the next topic takes each in turn.

1.1.1c Key economic decisions

Scarcity forces every economy to make choices

1. No economy can produce everything people want, so it must choose how to use its limited factors of production.
2. Those choices come down to three basic questions of resource allocation that no economy can avoid.

Three questions decide how resources are used

1. What to produce: which goods and services to make and in what quantities, since making more of one thing means making less of another.
2. How to produce: which method to use, such as more labour or more machinery.
3. For whom to produce: how the output is shared out among different people and groups.

Cadbury answers all three questions

1. What to produce: whether to make more Dairy Milk bars or expand its range of protein bars.
2. How to produce: whether to automate more of its Bournville factory or employ more staff on the line.
3. For whom to produce: whether output goes to UK supermarkets or is exported to shops abroad.
4. Every producer, and every economy as a whole, answers these same three questions on a different scale.

1.1.1d The main economic groups

Three groups drive all economic activity

1. Every economic decision in the UK is made by one of these three groups.
2. The same person can belong to more than one group, since a plumber is a producer at work and a consumer in the supermarket.

Each group pursues a different aim

1. Consumers aim for the most satisfaction they can get from a limited income, which is why they compare prices.
2. Producers aim to make a profit, which is why they supply the goods consumers will pay most for.
3. The government aims to serve society as a whole, which is why it funds services such as the NHS that a profit-seeking firm would not provide to everyone.
4. These aims pull against each other, since the price rise that boosts a producer's profit leaves consumers with less satisfaction from the same income.

The three groups depend on one another

1. The three groups are interdependent, meaning each relies on the others to play its part.
2. Consumers rely on producers for the goods and services they buy.
3. Producers rely on consumers to buy what they make, so if buying stops, producing stops.

Government links the other two

1. The government relies on both groups for tax revenue, such as VAT and income tax, to fund its spending.
2. Producers rely on the government for regulation, for taxes or subsidies on their output, and for infrastructure such as roads.
3. Consumers rely on the government for public services such as the NHS and state schools.
4. Because the groups interact constantly, a decision by one affects the other two.

1.1.2a The nature of an economic resource

Economic resources are scarce inputs

1. It is called a resource because an economy can draw on it, and a factor of production because it is combined with others to create output.
2. A resource is wanted for what it can make, so a bakery oven matters because of the bread it produces, not as an object.
3. Firms combine these inputs to create output, the goods and services people buy.

Scarcity is what makes it economic

1. Economic resources are scarce, meaning the quantity available is limited while the wants they could satisfy are unlimited.
2. Scarcity gives a resource alternative uses, so a field can grow wheat or carry houses, but not both at once.
3. Using it one way therefore means giving up what it could have produced instead, which creates an opportunity cost.
4. A truly unlimited input would not be an economic resource, because using it would cost nothing and deny nobody.

Resources are grouped into four categories

1. Economies use a huge variety of inputs, so economists sort them into a few categories to keep analysis manageable.
2. Those categories are the four factors of production, set out with the reward each one earns in the next article.

1.1.2b The four factors of production

Land, labour, capital and enterprise make output

1. Every business uses all four at once, so the skill is placing each named input in the right category.
2. Nobody produced land, and its supply is close to fixed, which is why a shop unit on Oxford Street costs far more than one in a market town.
3. What a firm gets from labour depends on the education, training and experience of its workers, not just the hours they work.
4. A firm builds up its capital through investment, giving up output today to buy equipment that raises output in future years.
5. The entrepreneur who supplies enterprise carries the risk, because a business can fail and leave its owner with nothing.
   1. That risk is why enterprise is a separate factor rather than another kind of labour.

Each factor earns a different reward

1. Land earns rent, the payment for the use of a site or natural resource, such as the monthly rent a coffee shop pays for a unit in a Manchester shopping centre.
2. Labour earns wages, the pay a worker receives for their time, such as the hourly rate a Tesco shop assistant gets for a shift.
   1. In the UK the National Living Wage sets a legal floor under that hourly rate for eligible workers.
3. Capital earns interest, the payment for the funds tied up in equipment, such as the interest a haulage firm pays on the loan that bought its lorries.
4. Enterprise earns profit, whatever is left for the owner once every other cost is paid, such as the sum a barber keeps after settling the shop rent and the staff wages.
   1. Profit is the only reward not agreed in advance, which is exactly why it rewards risk.
5. These four rewards are also the four kinds of income a UK household can earn, so what a firm pays out as a cost arrives elsewhere as somebody's income.

Spot each factor in a real business

1. Work through a case study input by input, quoting the detail as well as naming the factor.
2. A natural resource that has been processed becomes capital, so trees in a forest are land while planks in a joiner's workshop are capital.
3. The owner of a small business usually supplies two factors, working in it as labour and carrying the risk as enterprise.
4. A farmer's tractor is capital even though it never leaves the land, because the test is what the input is, not where it is used.
5. Remove any one of the four and output stops, which is why all four are treated as necessary rather than ranked.

1.1.3a The basic economic problem and making choices

Scarcity forces every economy to choose

1. Because the two never match, somebody must decide which wants are met and which go unmet.
2. That need to choose is what makes economics a subject, since unlimited resources would need no choices at all.
3. Every choice means giving up another, an idea called opportunity cost, covered in the next article.

Scarcity is not the same as a shortage

Every decision maker faces the same problem

1. Consumers choose what to buy with a limited income, so new trainers may mean going without a concert ticket.
2. Workers choose how to use limited time and skills, such as taking a Saturday shift instead of a day off.
3. Producers choose what to make with limited resources, so a car factory's line cannot build vans at the same time.
4. Governments choose how to spend limited tax revenue, so more for the NHS can mean less for defence or schools.

Weigh the benefit against what you give up

1. Every choice weighs an expected benefit against a cost, and that cost includes the next best alternative given up, not just the money paid.
2. A choice is worth making only when the benefit is greater than what is sacrificed to get it.
3. Whose benefits and whose costs are counted changes the answer, which is why decisions involve trade-offs between groups.
4. Timing matters too, since a benefit that recurs every year can outweigh a cost paid only once.

Leeds City Council weighs a £5 million choice

1. Leeds City Council has £5 million to spend and must choose between a new leisure centre and resurfacing its most damaged roads.
2. The leisure centre would improve residents' health and bring in membership income.
3. Choosing it leaves the roads damaged and raises the vehicle damage claims made against the council.
4. The health and membership benefits recur every year while the claims are a one-off cost, so the council can reasonably build the centre even though drivers lose out in the short term.
5. Change one fact, such as the roads being unsafe rather than merely bumpy, and the judgement flips, which is why the reasoning matters more than the answer.

1.1.3b Opportunity cost

Only the next best alternative counts

1. It arises from scarcity, so using money, time or materials one way rules out every other use at that moment.
2. To find it, list the options realistically available, rank them, then name the one at the top of the rejected list.
   1. Only that one counts, however many were rejected, because the chooser could have taken just one of them instead.
3. The idea judges a decision by what it displaces, which is why economists call every choice a trade-off.

Consumers, firms and government all face it

1. A consumer who spends £45 on trainers at JD Sports gives up the concert ticket that was the next best use of that £45.
2. A worker who takes a Saturday shift at Tesco gives up the revision time that was the next best use of the day.
3. A producer such as a bakery that runs its ovens on sourdough all morning gives up the sausage rolls those ovens could have baked.
4. The government that puts an extra £1 billion into the NHS gives up the next best public use of that money, such as new school buildings.
   1. Government choices show the idea most sharply, because a Budget fixes the total before any of it is allocated.

Opportunity cost is not always a money cost

1. Time is scarce too, so an hour spent one way carries an opportunity cost even when nothing is bought or sold.
2. Land and equipment can each do only one job at a time, so a farmer who sows a field with wheat gives up the barley it could have grown that season.
3. Where the sacrifice has no price tag, ask what the resource would otherwise have produced, and describe that.
4. A free good such as the air you breathe is the one case with no opportunity cost, because using it leaves nobody else with less.
   1. That is a quick test of understanding: if a choice really costs nothing, the resource was not scarce.