Basic Economic Ideas & Resource Allocation
Scarcity, Choice, and Opportunity Cost
The Fundamental Economic Problem
● Scarcity → There is a scarce amount of resources to satisfy the unlimited needs
and wants of society
● Eg. Skilled Labour -> Unemployment may occur, but highly skilled labour is
always scarce in the potential demand for it
● Main Outcome of this Problem -> There is a need to consider the different
possibilities in which the available resources could be allocated
Key Terms
● Economic Problem -> The situation of relative scarcity of resources in relation
to the unlimited needs and wants of people
● Needs -> The demand for something that is essential, such as food or shelter
● Wants -> The demand for something that is less important than the demand for a
need, for example a new car
● Scarcity -> The condition where there are insufficient resources to satisfy all the
needs and wants of people
● Choice -> The need to make decisions about the possible alternative uses of
scarce resources
○ Assumption -> Given the existence of limited resources and unlimited
needs and wants
● Economic Agents -> Individuals (consumers), Firms, and Governments
● Consumption -> The process by which consumers satisfy their needs/wants
● Production -> The process of creating goods and services in an economy
● Factors of Production -> Land, Labour, Capital, Enterprise
,Opportunity Cost
● Definition -> The next best alternative that is given up as a result of making a
choice
● Purpose -> Indicates the benefits that could have been obtained by choosing the
next best alternative
● Application -> It can be used to evaluate both consumption and production
decisions
Resource Allocation
● 3 Basic Economic Questions -> These 3 economic problems must be
addressed in every economy
1. What Goods to Produce? -> And how much will be produced; it is the
process of selection
2. How to Produce the Goods? -> The production process involves 4
factors of production (FOPS); this prompt considers how the FOPS will be
utilised to produce what is required in an economy
3. Whom to Produce the Goods For -> It is necessary to determine who
(individuals) will receive what (goods) The Answers to the 3 Questions
Above -> Will determine how the resources will be allocated within the
unlimited needs and wants, to achieve certain objectives
● The Answers to the 3 Questions Above -> Will determine how the resources will
be allocated within the unlimited needs and wants, to achieve certain objectives
Economic Methodology
Statement Basis
Positive Scientific / Factual Evidence
Normative Value Judgement
, ● Value Judgement -> Value that is a reflection of particular values or beliefs; the
opinion is based upon belief rather than factual evidence (subjective)
Ceteris Paribus
● Definition -> All other factors influencing 2 variables are assumed to remain
constant; “all other things being equal” (latin)
● Economic Laws -> Principles in Economics that can be observed to operate on
a regular basis; these laws require certain variables to be unchanged in order to
withhold
● Isolation -> Allows to identify the link between variables, without other factors
affecting the relationship
● Main Purpose of Ceteris Paribus -> Enables economic behaviours to be
studied from a controlled approach
Time Periods
● Short Run -> Some FOPS will be fixed and some will be variable
● Long Run -> All FOPS may change
● Very Long Run -> All FOPS may change + Supply can change as a result of
Technical Progress
○ Technical Progress -> Constant in the short and long run, only variable in
the very long run; improves the firms’ ability to supply
Time FOPS that can Output
Period Change
Short Run Only some FOPS Can only increase by using
may change more of the variable factors
Long Run All FOPS may Can increase by using more of
change the variable factors
Scarcity, Choice, and Opportunity Cost
The Fundamental Economic Problem
● Scarcity → There is a scarce amount of resources to satisfy the unlimited needs
and wants of society
● Eg. Skilled Labour -> Unemployment may occur, but highly skilled labour is
always scarce in the potential demand for it
● Main Outcome of this Problem -> There is a need to consider the different
possibilities in which the available resources could be allocated
Key Terms
● Economic Problem -> The situation of relative scarcity of resources in relation
to the unlimited needs and wants of people
● Needs -> The demand for something that is essential, such as food or shelter
● Wants -> The demand for something that is less important than the demand for a
need, for example a new car
● Scarcity -> The condition where there are insufficient resources to satisfy all the
needs and wants of people
● Choice -> The need to make decisions about the possible alternative uses of
scarce resources
○ Assumption -> Given the existence of limited resources and unlimited
needs and wants
● Economic Agents -> Individuals (consumers), Firms, and Governments
● Consumption -> The process by which consumers satisfy their needs/wants
● Production -> The process of creating goods and services in an economy
● Factors of Production -> Land, Labour, Capital, Enterprise
,Opportunity Cost
● Definition -> The next best alternative that is given up as a result of making a
choice
● Purpose -> Indicates the benefits that could have been obtained by choosing the
next best alternative
● Application -> It can be used to evaluate both consumption and production
decisions
Resource Allocation
● 3 Basic Economic Questions -> These 3 economic problems must be
addressed in every economy
1. What Goods to Produce? -> And how much will be produced; it is the
process of selection
2. How to Produce the Goods? -> The production process involves 4
factors of production (FOPS); this prompt considers how the FOPS will be
utilised to produce what is required in an economy
3. Whom to Produce the Goods For -> It is necessary to determine who
(individuals) will receive what (goods) The Answers to the 3 Questions
Above -> Will determine how the resources will be allocated within the
unlimited needs and wants, to achieve certain objectives
● The Answers to the 3 Questions Above -> Will determine how the resources will
be allocated within the unlimited needs and wants, to achieve certain objectives
Economic Methodology
Statement Basis
Positive Scientific / Factual Evidence
Normative Value Judgement
, ● Value Judgement -> Value that is a reflection of particular values or beliefs; the
opinion is based upon belief rather than factual evidence (subjective)
Ceteris Paribus
● Definition -> All other factors influencing 2 variables are assumed to remain
constant; “all other things being equal” (latin)
● Economic Laws -> Principles in Economics that can be observed to operate on
a regular basis; these laws require certain variables to be unchanged in order to
withhold
● Isolation -> Allows to identify the link between variables, without other factors
affecting the relationship
● Main Purpose of Ceteris Paribus -> Enables economic behaviours to be
studied from a controlled approach
Time Periods
● Short Run -> Some FOPS will be fixed and some will be variable
● Long Run -> All FOPS may change
● Very Long Run -> All FOPS may change + Supply can change as a result of
Technical Progress
○ Technical Progress -> Constant in the short and long run, only variable in
the very long run; improves the firms’ ability to supply
Time FOPS that can Output
Period Change
Short Run Only some FOPS Can only increase by using
may change more of the variable factors
Long Run All FOPS may Can increase by using more of
change the variable factors
