IGCSE Economics

INTRODUCTION TO ECONOMICS
Scarcity & The Economic Problem

Economics refers to the branch of knowledge concerned with the production, consumption, and
transfer of wealth. (https://en.oxforddictionaries.com/)

The economic problem exists because, although the needs and wants of people are endless, the
resources available to satisfy needs and wants are limited.

Resources are limited:

in physical quantity, as in the case of land, which has a finite quantity.
in use, as in the case of labour and machinery, which can only be used for one purpose at any one
time.

OPPORTUNITY COST
Choice and opportunity cost are two fundamental concepts in economics. Given that resources
are limited, producers and consumers have to make choices between competing alternatives. All
economic decisions involve making choices. Individuals must choose how best to use their skill
and effort, firms must choose how best to use their workers and machinery, and governments
must choose how best to use taxpayer's money. Making an economic choice creates a sacrifice
because alternatives must be given up, which results in the loss of benefit that the alternative
would have provided.

For example, if an individual has £10 to spend, and books are £10 each and downloaded music
tracks are £1 each, buying a book means the loss of the benefit that would have been gained from
the 10 downloaded tracks.
Another example is when the government has to decide about the use of a green piece of land
and other resources. If the land is used to build a new school but it could have been used to build
new government offices, this creates an OC. The loss of the next best option represents the real
sacrifice and is referred to as opportunity cost. The opportunity cost of choosing the school is the
loss of the office building, and what services could have been provided at it.

It is necessary to appreciate that opportunity cost relates to the loss of the next best alternative,
and not just any alternative. The true cost of any decision is always the closest option not chosen.

Definition: Opportunity cost measures the cost of any choice in terms of the next best alternative
foregone.

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Scarcity refers to limitations—insufficient resources, goods, or abilities to achieve the desired
ends. Figuring out ways to make the best use of scarce resources or find alternatives is
fundamental to economics.

Because of scarcity, choices have to be made by consumers, businesses and governments. For
example, over six million people travel into London each day and they make choices about when
to travel, whether to use the bus, the tube, to walk or cycle – or whether to work from home.
Millions of decisions are being taken, many of them are habitual – but somehow on most days,
people get to work on time and they get home too!

Trade-offs when making choices

Making a choice made normally involves a trade-off. This means that choosing more of one thing
can only be achieved by giving up something else in exchange.

Examples of trade offs include:

 Work-leisure choices: The opportunity cost of deciding not to work an extra ten hours a
week is the lost wages foregone. If you are being paid £6 per hour to work at the local
supermarket, if you take a day off from work you might lose £48 of income.

 Government spending priorities: The opportunity cost of the government spending nearly
£10 billion on investment in National Health Service might be that £10 billion less is
available for spending on education or the transport network.

 Housing: Choices about whether to rent or buy a home

There are costs and benefits to renting a property or in choosing to buy a home with a
mortgage. Both decisions involve risk. People have to weigh up the costs and benefits of
the decision.

 Working: Do you work full-time or part-time?

Is it worth your while studying for a degree? How have these choices been affected by the
introduction of university tuition fees?

TASK: WIS is building a new Media Studies wing. What do you think was the opportunity
cost of this project? Give three examples.

WIS would have sacrificed a lot of space which could have been used on subjects which are more
popular such as science, maths and PE facilities.

In a world of scarcity, satisfaction of one want necessarily means the non satisfaction of one or
more other possible wants. Any use of resources involves an opportunity cost because an
alternative use, be necessity, is sacrificed.
We look for the highest value alternative to determine the opportunity cost.

It is often said that the central purpose of economic activity is the production of goods and services
to satisfy our changing needs and wants.

The basic economic problem is about scarcity and choice. Every society has to decide:

1. What goods and services to produce: Does the economy uses its resources to operate
more hospitals or hotels? Do we make more iPhones and iPads or double-espressos?
Does the National Health Service provide free IVF treatment for childless couples?

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 2. How best to produce goods and services: What is the best use of our scarce resources?
Should school playing fields be sold off to provide more land for affordable housing? Should
coal be produced in the UK or is it best imported from other countries?

3. Who is to receive goods and services: Who will get expensive hospital treatment - and who
not? Should there be a minimum wage? If so, at what level should it be set?

TASK: Circle the best answer in the multiple choice questions below. Explain why you
chose it in the space below.

1.D because that is the alternate action they could take.

___________________________________________________________________
2.C because the job takes a large amount of time.

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 FACTORS OF PRODUCTION

The scarce resources used in the production of goods and services are called the factors of
production. These are inputs into the production process from which outputs of goods and
services emerge.

Land: Land encompasses resources derived from nature. This includes the land on which a
business is built and also other natural resources such as seas, rivers, forests, air and any
resources extracted from the earth. The reward for land is rent.

Labour: labour is people who work to produce goods or services. Labour is sometimes referred to
as Human Resources. The reward for labour is wages.

Capital: Capital refers to man-made resources which help to produce other goods and services.
Capital includes things such as factories, machinery and delivery vehicles. The reward for capital
is interest.

Enterprise
Enterprise is the entrepreneur, the person with the business idea. They take the other 3 factors of
production and combine them together to start a business. Their main reward is the profit made
from running the business.

How can governments help entrepreneurs start their own business?

 Cheap loans
Governments can provide loans at low interest rates to entrepreneurs who they feel have
a good business idea. This makes it easier for entrepreneurs who don’t have much money
to start a business.

 Advice and support

In every country there is usually at least one government agency that provides advice and
support to entrepreneurs on matters such as how to draw up a business plan, how to
prepare a cash flow statement, how to market effectively etc. Can you name such an
agency in Vietnam?

 Reduced taxes on profits for new small businesses

Giving tax breaks to entrepreneurs encourage people to start a business and increases
their chances of being successful.