6.

1 Basic economic problem: choice and the

allocation of resources

define the nature of the economic problem (finite resources and

unlimited wants)

limited/finite resources + unlimited/infinite wants = SCARCITY of resources

The basic economic problem is the scarcity of resources, where there are too limited
resources to satisfy unlimited wants.

define the factors of production (land, labour, capital, enterprise)

Land = natural resources e.g. raw materials (trees, ores, etc.)

Labour = (work / productive effort of) human resources e.g. workers
Capital = man-made resources e.g. tools, machinery, office/factory buildings
Enterprise = (quality that entrepreneurs possess) willingness to take risks, start and
run/operate a business, which involves combining and organizing resources in a firm
to produce goods and services.

define opportunity cost and analyse particular circumstances to

illustrate the concept

Opportunity cost is the next best alternative (and its benefit) forgone once a choice
/ decision is made.

e.g.
You have some some resources. You have lots of possible choices on ways to use
them which have many different purposes. Choosing one will always mean having to
give/throw away the opportunity to use the resources in another way.

demonstrate how production possibility curves can be used to

illustrate choice and resource allocation
Just as an introduction: the problem of resource allocation is choosing how best to
use limited productive resources to satisfy as many needs and wants & to maximize
economic welfare.

In a PPC, there are two products which resources can be allocated to each one. The
curve represents the maximum resource allocation between the two products.
(Anywhere within the curve can be produced with given resources and current scale
of production)

In such question, make a reference to opportunity costs by giving its definition. Then,
simply say that the firm can choose to produce a combination of both products, or
just concentrate more/most/all resources on only one product. If more resources are
used for one, less resources would be left to product the other. Mention an example:
If all resources are allocated into production 200 clothes, 300 accessories will be
forgone. Thus the 300 accessories would be the opportunity cost.

evaluate the implications of particular courses of action in terms

of opportunity cost.
Economic actions from different economic agents
1. Consumers: when a consumer buy a sandwich for lunch, the
opportunity that he/she is giving up is the next best alternative that he/she
could have spend the money on. This might be a rice bowl or any other food
that he/she can obtain.
2. Producers: decisions made by producers include - what to produce
and where to produce. For example when a farmer decides to grow corn in a
particular field, the opportunity cost is the next best crop that could be grown,
e.g. onions.
3. Government: income received to the government in the form of taxes
and other revenues needs to be allocated to various government ministries
such as health, education defence and transport. If US$100 million extra is
spent on education, that money cannot also be spent on health of road
building.

Links to other units

6.2 The allocation of resources: how the market works; market

failure

6.3 The individual as producer, consumer and borrower

6.4 The private firm as producer and employer

6.5 Role of government in and economy

6.6 Economics indicators

6.7 Developed and developing economies: trends in

production, population and living standards

6.8 International aspects