1.1.1 The economic problem
a) The problem of scarcity
The problem of scarcity is where there are unlimited wants and finite resources, leading to the need to make choices.
This economic problem requires individuals, businesses, and governments to make decisions on how to effectively allocate resources while taking opportunity costs and trade-offs into consideration.
b) Opportunity cost and its effect on economic agents (consumers, producers and government).
Definition: Opportunity cost is the value of the next best alternative forgone when making a decision.
Effects:
Consumers - When consumers make choices, they sacrifice alternatives, affecting consumption habits and utility (satisfaction).
Producers - Producers face opportunity costs when allocating resources, and deciding between different products or investment opportunities.
Government - Governments must consider opportunity costs when allocating budget resources, such as providing funding to certain sectors.
c) The use of diagrams to show the production possibility curve.
Definition: A production possibility curve is a graphical representation of the maximum productive potential of an economy in producing two goods when resources are fully and efficiently utilised.
d) A production possibility curve diagram should be used to show:
The maximum productive potential of an economy
Fully employed or unemployed resources
Opportunity cost
Positive or negative economic growth that shifts the production possibility frontier (PPF) outwards and inwards
Possible and unobtainable production.
e) Possible causes of positive or negative economic growth.
Possible causes of positive economic growth:
Increased investment in capital and technology.
Improvements in workforce skills.
Discovery or utilisation of natural resources.
Favourable government policies.
Possible causes of negative economic growth:
Resource depletion or natural disasters.
Political instability or conflict.
Decreased workforce productivity.
Unfavourable government policies.
