Firms may also need to make long-term investment decisions to invest in new products and new means of production. Government The government has finite resources and its spending power is limited by the amount of tax that they can collect. The government needs to decide how they collect tax and then they need to decide whom they spend money on. For example, the government may wish to cut benefits to those on low income to increase incentives to work. However, cutting benefits will increase inequality and relative poverty. Opportunity cost and the economic problem The economic problem can be illustrated with the concept of opportunity cost. Opportunity cost is the next best alternative foregone. A consumer with a limited income of £20,000 year continually faces choices, if they spend £3,000 on a new car, then that is £3,000 they cannot spend on food and drink
If a student spends three years in education, the opportunity cost is the lost potential of earning from a full-time job. Government A government may have choices on how to spend limited resources. In this simple model, they have a choice between health care and military spending. If they increase spending on the military, the opportunity cost is less spending on health care.
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- Winter '17
- Economics, producer, three years, 20,000 year, Basic Economics Problem