1.1. The nature of the basic economic problem
- Syllabus
- 0455–2027–2028
- Topic
- 1.1
- Level
- —
Learning objectives
1.1.1Finite resources and infinite wants• definition of the basic economic problem• the concept of scarcity• examples of the basic economic problem in the context of:• consumers• workers• producers/firms• governments1.1.2Resource allocation decisions• The three basic economic questions which determine resource allocation:• what to produce• how to produce• who to produce for1.1.3Economic goods and free goods• the difference between economic goods and free goods
Scarcity forces every economic agent to choose
The basic economic problem is that resources are finite while human wants are unlimited. Because available resources cannot satisfy every want, resources are scarce and choices must be made.
Scarcity is relative: even a wealthy person or country still has limited income, time, workers, equipment, land and natural resources compared with all possible wants. Economic growth can expand what is available, but it does not remove the problem if wants continue to exceed resources.
| Decision-maker | Scarce resource and resulting choice |
|---|---|
| consumer | limited income and time mean not every desired product can be obtained |
| worker | limited time, skills and job opportunities require choices about work |
| producer/firm | limited labour, equipment and finance require choices about output |
| government | limited tax revenue and resources require choices among public priorities |
A government may want more hospitals, schools and transport, yet its budget and available workers are limited. Building all projects immediately is impossible, so it must decide how to allocate what it has.
Scarcity does not mean that nothing exists, nor does it require poverty or an unequal distribution. It means resources are insufficient relative to all wants, which is why choices remain necessary.
Answer the three resource-allocation questions
Scarcity requires every economy to decide what to produce, how to produce it and for whom to produce it. Together, these questions determine how scarce resources and the resulting output are allocated.
| Question | Decision being made | Example |
|---|---|---|
| what to produce? | which goods and services, and how much of each | car batteries or laptop batteries |
| how to produce? | which production method and mix of resources | more workers or more machinery |
| for whom to produce? | who receives or can obtain the output | how products are distributed among income groups |
The questions are linked. Choosing more of one product uses resources that cannot simultaneously make every other product; choosing a labour-intensive or capital-intensive method changes which resources are used; distribution determines which groups benefit from the output.
‘How much?’ belongs inside what to produce, and ‘when?’ is not one of the three named questions. ‘For whom?’ is about the recipients of output, not the identity of the workers who manufacture it.
Classify economic goods and free goods
An economic good is scarce relative to wants and uses resources to provide, so obtaining or producing it has an opportunity cost. A free good is available without using scarce resources and has no opportunity cost.
| Feature | Economic good | Free good |
|---|---|---|
| availability relative to wants | limited/scarce | sufficiently abundant |
| scarce resources used to provide it | yes | no |
| opportunity cost | yes | no |
| typical example | food | sunlight or naturally available air |
Producing food uses land, labour and capital that could have been used elsewhere, so food is an economic good. Naturally available sunlight does not need resources to produce and, in ordinary conditions, using it does not require another output to be sacrificed.
‘Free good’ does not simply mean a zero price. State-funded healthcare or a free sample still uses scarce resources, so it is an economic good even if the user pays nothing at the point of use. Classify by scarcity and opportunity cost, not by the price charged.