1.1 Scarcity, Choice & Opportunity Cost

What is the fundamental economic problem

Wants are unlimited but resources (inputs used to produce goods and services) are scarce, so choices must be made about how to allocate scarce resources among competing uses.

What are scarce resources

The factors of production: land, labour, capital and enterprise—all limited relative to the wants they could satisfy.
 - Resources are inputs available for the production of goods and services

What is the difference between needs and wants

Needs are essentials for survival (food, shelter, clothing). Wants are desires beyond basic needs (goods and service people would like to have); they expand and change over time.

Why are wants described as unlimited (4)

There is always likely to be something else that a person wants whatever their income
 - Preferences evolve with age, income, culture and experiences
 - New products appear
 - People revise their scale of preference (urgent wants at top, less urgent wants at bottom), so there is always another want.

What is scarcity

A situation where wants and needs are greater than the resources available

Who faces the fundamental economic problem

Individuals, firms and governments—each has limited resources and many competing objectives.

What does making a choice mean in economics

Selecting one option and forgoing the next best alternative because resources cannot satisfy all wants simultaneously.

Why must individuals make choices

Limited income and time mean selecting which wants to satisfy now and which to postpone.

Why must firms make choices

Finite budgets and capacity force decisions about what products to make, what methods to use, and trade‑offs between costs and ethical or social considerations (e.g., objection to cheap labour).

Why must governments make choices

A limited tax‑funded budget must be allocated across competing priorities (health vs education vs defence), with distributional goals influencing decisions.

What is a scale of preference

An ordered ranking of wants from most to least urgent, used by decision‑makers when allocating scarce resources.

What is opportunity cost

The value of the next best alternative forgone when a choice is made.
 - The cost expressed in terms of the next best alternative that is foregone when a choice is made

Why is opportunity cost called the ‘real cost’

It measures what is sacrificed in order to obtain the chosen option, not just the money spent.

What exam tip applies to opportunity cost

Treat it as a recurring theme: every time there is a choice, state the alternative forgone explicitly.

What are the three basic questions of resource allocation

What to produce, How to produce, For whom to produce

What does ‘what to produce’ involve

Choosing which goods and services and in what quantities (e.g., consumer goods vs defence equipment) because not everything can be produced.

What does ‘how to produce’ involve

Selecting production methods to use resources most effectively to achieve the best outcome (e.g., labour‑intensive vs capital‑intensive), sometimes weighing non‑economic concerns (e.g., ethical objections to cheap labour).

What does ‘for whom to produce’ involve

Determining the distribution of output and income—whether outcomes are more equal or unequal, via policies like taxation and transfers, noting that inequality is significant in many emerging economies.

How do the three questions link back to scarcity

Because resources are scarce, societies must decide which wants to satisfy, which methods to use, and how benefits are shared—each decision carries an opportunity cost.