A Level Economics OCR

The Economic Problem

Understanding the Economic Problem

• The economic problem is essentially the issue of scarcity.
• Scarcity refers to the basic economic problem where available resources are insufficient to satisfy all human wants and needs.
• Every individual, business, and country faces the problem of scarcity.

Resource Scarcity

• Resources are the inputs used in the production of goods and services.
• They are often categorised into land, labour, capital and enterprise.
• These resources have alternative uses and are finite.
• Because resources are scarce, people and societies must make choices about how to allocate them.

Making Choices

• The necessity to make choices leads to opportunity cost.
• Opportunity cost is the cost of the next best alternative foregone.
• It isn't just about monetary or measurable cost; opportunity cost can also consider factors such as time, convenience, or any other benefit that is given up.

Production Possibility Frontier

• The concept of scarcity, choice and opportunity cost is demonstrated using the production possibility frontier (PPF).
• The PPF shows the maximum combination of two goods or services that can be produced using all resources efficiently.
• Any point on the PPF represents allocative efficiency, where it is impossible to produce more of one good without producing less of another.
• Any point inside the PPF represents productive inefficiency.
• Any point outside the PPF is currently unattainable given the resources and technology available.

Economic Systems

• An economic system is a way of answering the basic economic questions: what, how, and for whom to produce.
• There are three types of economic systems: command economies, where the state makes all decisions; free market economies, where market forces of supply and demand dictate decisions; and mixed economies, which combine elements of both.
• Different societies have different economic goals and different ways of allocating resources to achieve those goals.

With a firm understanding of the concept of the economic problem, it becomes apparent why individuals and societies need to make informed choices about how to best utilise their scarce resources. In essence, economics is the study of how those choices are made and how different outcomes can be achieved.