The basic economic problem is the starting point for understanding economics. It arises because resources are finite while human wants are unlimited.
Finite resources and infinite wants
Human wants are unlimited, but the resources available to satisfy those wants are limited. This creates the basic economic problem.
Resources are scarce because there are not enough resources available to produce everything that people want. Because resources are scarce, choices have to be made about how they are used.
What is scarcity?
Scarcity is the fundamental economic problem arising because resources are finite while human wants are unlimited.
Scarcity affects everyone. Consumers have limited income, workers have limited time and skills, producers have limited resources for production, and governments have limited resources with which to provide public services.
Scarcity affects everyone
The syllabus specifically considers the basic economic problem in four contexts.
Consumers
Consumers have limited income but many wants. They therefore have to decide which goods and services to purchase.
Workers
Workers have limited time and skills. They must make choices about how to use their time and which work opportunities to pursue.
Producers and firms
Firms have limited resources such as labour, capital and raw materials. They must decide how those resources should be used in production.
Governments
Governments have limited resources and must make choices about how resources should be allocated between competing priorities.
Resource allocation decisions
Scarcity means resources have to be allocated. This creates three fundamental economic questions.
What to produce?
Which goods and services should be produced, and in what quantities?
How to produce?
Which resources and methods should be used to produce the chosen goods and services?
Who to produce for?
Who should receive the goods and services that are produced?
Economic goods and free goods
The syllabus requires students to understand the difference between these two categories.
Economic goods
Goods that are scarce in relation to demand and therefore involve an opportunity cost when resources are used to produce or obtain them.
Free goods
Goods that are available without being scarce in relation to demand and therefore do not require resources to be allocated to their production in the same way as economic goods.
Know these ideas precisely.
- Definition of the basic economic problem
- Concept of scarcity
- Examples of scarcity affecting consumers, workers, producers/firms and governments
- The three resource allocation questions: what, how and who to produce for
- Difference between economic goods and free goods