Cambridge International AS & A Level Economics (9708)
Chapter 1.1: Scarcity, Choice and Opportunity Cost
Welcome to the very foundation of Economics! Don't worry if this seems tricky at first—this chapter introduces the fundamental idea that drives all economic activity. Once you understand this core concept, everything else in the course will make much more sense!
We are learning about the fundamental problem that makes economics necessary: the conflict between what we want and what we have.
1. The Fundamental Economic Problem: Scarcity (1.1.1)
The entire study of Economics revolves around one painful truth: Scarcity.
What is Scarcity?
Scarcity exists because our desires (wants) are virtually unlimited, but the resources available to satisfy them are limited.
- Wants: These are the desires of individuals, firms, and governments. They include basic needs (food, water) but also luxuries (big houses, high-speed internet, better roads). Crucially, economists assume human wants are unlimited—as soon as one want is satisfied, another one emerges.
- Resources (Factors of Production): These are the inputs used to produce goods and services. They are limited (finite). (We will study the factors of production in detail in Chapter 1.3, but for now, just know they are finite inputs.)
The economic problem arises from this imbalance:
Unlimited Wants > Limited Resources = Scarcity
Did you know?
Scarcity affects everyone, even billionaires! While they have vast financial resources, they still face scarcity of time (they can only be in one place at once) and attention. Scarcity is a universal condition.
Key Takeaway: Scarcity is the central problem in economics. Because we cannot have everything, we must make decisions.
2. The Necessity of Choice (1.1.2)
Since resources are scarce, every economic agent—individuals, firms, and governments—must constantly make choices about how to allocate their limited resources.
Choice at Different Levels
1. Individuals (Households):
You have a limited budget and limited time. You must choose how to spend them.
- Example: Do you spend your £50 allowance on a new video game or save it for textbooks?
- Example: Do you spend the next hour studying for Economics or watching a movie?
2. Firms (Businesses):
Firms have limited capital and labour. They must choose what to produce and how to produce it efficiently.
- Example: Does a car manufacturer invest in automating its production line (physical capital) or hiring more workers (labour)?
- Example: Does a farm grow maize (corn) or soybeans on a specific piece of land?
3. Governments:
Governments have limited tax revenue (their budget). They must decide which sectors to fund.
- Example: Should the government spend an extra £10 million on building new hospitals (healthcare) or improving national defense (security)? This is often called the "guns versus butter" trade-off.
Key Takeaway: Scarcity forces choices at all levels, from the single consumer deciding on lunch to the national government deciding the budget.
3. Opportunity Cost (1.1.3)
Whenever a choice is made, something must be sacrificed. The value of this sacrifice is defined as the Opportunity Cost.
Definition and Nature of Opportunity Cost
Definition: The Opportunity Cost is the value of the next best alternative foregone when an economic decision is made.
This is arguably the most important concept you will learn in AS Economics. It is not the total list of things you gave up, but specifically the single best option you rejected.
Analogy: The Weekend Plan
Imagine you have a free Saturday afternoon. You have three options, ranked by how much you value them:
- Going to a concert (Most preferred)
- Visiting your grandmother (Second preferred)
- Studying Economics (Third preferred)
If you choose Option 1 (the Concert):
The opportunity cost is Option 2 (Visiting your grandmother), because this was the next best alternative you gave up.
Common Mistake to Avoid: Opportunity cost is not the monetary price of the choice. It is the value of the alternative activity you missed out on. If the concert ticket costs $50, the $50 is the price (the accounting cost), but the opportunity cost is the value of visiting your grandmother.
Quick Review: Calculating Opportunity Cost
If a government decides to build a new high-speed rail line, and the next most beneficial project they could have funded was a large renewable energy park, what is the opportunity cost?
The opportunity cost is the value (the forgone benefits) of the renewable energy park.
Key Takeaway: Every choice involving scarce resources has an opportunity cost, which is the value of the single best alternative option you did not choose.
4. The Basic Questions of Resource Allocation (1.1.4)
Because of scarcity, every society, regardless of its economic system (market, planned, or mixed—covered in 1.4), must answer three fundamental questions regarding resource allocation:
1. What to produce?
This question deals with the types and quantities of goods and services to be produced. Since resources are limited, producing more of one good means producing less of another.
- Example: Should a nation prioritize producing consumer goods (like cars and mobile phones) or capital goods (like machinery and factories)?
2. How to produce?
This question addresses the method and technology used in production.
- Example: Should a factory use methods that rely primarily on human labour (labour-intensive) or those that rely heavily on machines and technology (capital-intensive)? The goal is usually efficiency, meaning producing goods at the lowest possible cost.
3. For whom to produce?
This question concerns the distribution of the produced goods and services among the population. Essentially, who gets to consume what is produced?
- Example: Should goods be distributed based on who can afford to pay for them (a market-based approach) or distributed equally/based on need (a more planned or equitable approach)?
Key Takeaway: The three core resource allocation questions (What, How, For Whom) are a direct result of universal scarcity and the need for organized choice.
H5 Quick Review: Key Concepts 1.1
- Scarcity: Unlimited wants vs. limited resources. This is the starting point of economics.
- Choice: The action taken when facing scarcity.
- Opportunity Cost: The value of the next best alternative given up as a result of making a choice.
- Allocation Questions: What, How, and For Whom to produce.
Keep these three core ideas (Scarcity, Choice, Opportunity Cost) linked in your mind. They are inseparable!