1.1 - scarcity, choice and opportunity cost

The fundamental (basic) economic problem

arises because there are scarce resources but unlimited wants. 

Resources

the inputs used to produce goods and services

e.g. land. 

Wants

the goods and services people would like to have but are not essential for living

e.g. a television, a private jet or a holiday. 

Needs

things that are essential for survival

e.g. food, clothing, shelter. 

Scarcity

a situation in which there are not enough resources to meet the needs and wants of people

Choices

have to be made at all levels (individuals, firms, government) as to how scarce resources should be allocated between alternative uses (wants). 

Opportunity cost

the cost expressed in terms of the next best alternative that is foregone when making a choice. 

The fundamental economic problem leads to _

three important questions about how resources should be allocated, which all economies have to answer

What are the 3 basic questions of resource allocation?

1. What to produce?

2. How to produce?

3. For whom to produce?

Elaborate on “What to produce?”

Economies cannot produce everything and therefore must decide what to produce and in what quantities. 

e.g. A government may decide to produce more consumer goods to improve living standards.

Elaborate on “How to produce?“

Firms need to consider how they can get the maximum or best use out of available resources. 

e.g. a farmer may decide to use fewer workers and more capital equipment to produce crops. 

Elaborate on “For whom to produce?”

Governments need to decide who is going to receive what is produced - whether goods should be distributed to people according to their needs or their ability to earn a high income.

e.g. A government may aim for a more equal distribution of income and wealth - enabling the poor to afford what is produced.