The basic economic problem of scarcity, the difference between needs and wants, opportunity cost, and why choices must be made by consumers, producers and government.

What this dot point is asking

OCR wants you to explain the basic economic problem, distinguish needs from wants, define opportunity cost, and show why consumers, producers and government must all make choices. Almost every later topic builds on this idea of scarcity and choice.

The basic economic problem

Scarcity is the central idea of economics. It is not the same as poverty: even a rich country has scarce resources relative to everything its people might want. Because resources are scarce, using them one way means not using them another way, which forces choice.

Needs and wants

The distinction matters because it explains why scarcity never goes away. Even if everyone's needs were met, people would still want more and better goods, so resources would remain scarce relative to wants.

Choice and opportunity cost

Because resources are scarce, choosing to use them one way means giving up another use. The benefit of that forgone alternative is the opportunity cost.

For example, if the government uses a piece of land to build a hospital, the opportunity cost is the next best use, perhaps a school or housing. If you spend two hours revising, the opportunity cost might be the football match you could have watched instead.

Who has to choose

All three main economic groups face scarcity and so must choose:

• Consumers have limited income, so spending on one good means less for another. Buying concert tickets may mean giving up new trainers.
• Producers have limited resources and finance, so producing more of one good means producing less of another. A factory making more cars may make fewer vans.
• Government has a limited budget, so funding one service means less for another. More on healthcare may mean less on transport.

Resource allocation

Because choices must be made, every economy needs a way to allocate its scarce resources between competing uses. In a market economy this is done largely through prices and the profit motive; in a command economy the government decides; most real economies are mixed, using both. This sets up the later study of how markets allocate resources through demand and supply.

Try this

Q1. Explain the difference between a need and a want, with an example of each. [3 marks]

• Cue. A need is essential for survival (food); a want is desirable but not essential (a holiday).

Q2. A student spends their savings on a laptop. State what the opportunity cost might be. [2 marks]

• Cue. The next best thing the savings could have bought, for example a bicycle or a phone.