Key Idea: You want more than you can have. Everyone does. So you have to choose. That is where all of economics starts. This topic gives you the ideas that come out of it: what is scarce, what a choice costs, who decides what gets made, and two diagrams that show it. Where you meet it:
Paper 1
- Essays.
- You argue them with the nine concepts listed just below.
Paper 2
- Data response.
- 2-mark defines: resources, entrepreneurship, private sector.
- 4-mark explains with a PPC or circular-flow diagram.
Every later unit
- Nothing here disappears.
- Opportunity cost is the downside of every policy.
- The circular flow is what Unit 3 is built on.
🧠 The nine concepts
Nine ideas that run through the whole course. Tap each one for what it means and one example.
Scarcity People want more than there is. Wants never run out; resources do. Every choice in economics starts here. Example: a hospital has 12 beds and 20 people who need one tonight.
Choice Because there is not enough, you have to pick. Choosing one thing means giving up another. Example: a government has €50m. It can build a road or a school, not both. It picks the road, so there is no new school this year.
Efficiency Nothing is wasted. Resources are used where they produce the most. Example: two bakeries get the same flour. One makes 500 loaves, the other only 300. The second one is wasting flour, so it is the inefficient one.
Equity A fair share. Fair does not always mean equal. Example: free school meals go to the families who need them, not to every family.
Economic well-being How good people's lives are, not just how much money the country makes. Example: GDP goes up, but people work longer hours and the air gets worse.
Sustainability Using resources today in a way that leaves enough for the people after us. Example: fish regrow 100 000 tonnes a year. Catch 80 000 and there are always fish. Catch 120 000 and one day there are none.
Change Things keep changing. That is why so many diagrams show a curve moving. Example: oil gets more expensive, so everything costs more to make, so supply shifts.
Interdependence What happens in one place affects people somewhere else. Example: a factory shuts in China and phone shelves empty in Europe.
Intervention Should the government step in, or leave it to the market? You argue this in every unit. Example: a minimum wage. A sugar tax. A ban on single-use plastic.
Nobody asks you to list them. In an essay, pick two that clash and argue both sides: efficiency against equity, growth against sustainability. A definition on its own is worth almost nothing. A definition put to work on a real country is the whole answer.
🧭 Scarcity and the four factors
Wants keep going. Resources do not. That gap is scarcity, and it never ends — a rich country has it too. The resources are the four factors of production, and each one earns a different income.
| Factor | What it is | Income it earns |
|---|---|---|
| Land | anything from nature — fields, fish, oil, sunlight | rent |
| Labour | human effort, physical or mental | wages |
| Capital | things made to make things — machines, factories, roads | interest |
| Entrepreneurship | combines the other three and takes the risk | profit |
Resources = factors of production. Papers say resources, or inputs — the same four things. Money is not capital. Cash produces nothing; the machine it buys is capital.
⚖️ Opportunity cost — and the words next to it
Scarcity forces a choice, and whatever you chose, something else was given up. Most marks in this topic are lost by mixing up words that sit close together — keep these pairs apart.
| Word | Means | Do not confuse with |
|---|---|---|
| Opportunity cost | the next best alternative given up — one thing | the price tag, or a list of everything else |
| Trade-off | the swap you face — more of one means less of another | opportunity cost — the one thing you actually gave up |
| Scarcity | unlimited wants, limited resources — permanent | a shortage (temporary: more arrives Tuesday), or poverty |
| Free good | not scarce, so no opportunity cost — air to breathe | free to you — bottled water, free school meals; someone still paid |
| Equity | fairness | equality — everyone gets the same |
| Micro | one market — energy drinks, concert tickets | macro — the whole country: inflation, unemployment |
Important: The opportunity cost of the hospital is €50 million. No — that is the price. The cost is the school it did not build. Name the thing, not the number — and in a data response, take it from the text.
❓ Three questions, two ways to answer them
Every country faces the same three questions — what to produce, how, and for whom. Countries differ only in who answers: prices, or the government. When prices answer, one price does three jobs at once.
| Price mechanism | What the price does | Concert tickets resold at €200 |
|---|---|---|
| Signalling | carries the news — a high price says many want it, few exist | €200 says far more fans want in than there are seats |
| Incentive | makes someone act — more gets made because there is money in it | the organisers add three more nights |
| Rationing | decides who gets it — whoever will pay most | the price settles which 2 000 people get in |
For a gig, fine. Make it insulin, or a flat to live in, and whoever pays most gets it stops being fine. That gap is the whole argument of Unit 2: should the government step in?
| System | Who decides | Strength | Weakness |
|---|---|---|---|
| Free market | prices — nobody plans it | fast; firms rush to make what sells | whoever cannot pay goes without |
| Planned | the government | can aim at need, not ability to pay | slow; shortages and waste |
| Mixed | both | every real country — the argument is about the mix | — |
No pure example exists. Singapore and Hong Kong sit nearest the free-market end, North Korea nearest planned — everyone is mixed. A public limited company is private sector. Public there means anyone can buy its shares. Private or public sector is about who owns it, not what it does.
📈 The production possibilities curve
The PPC is scarcity, drawn: every mix of two goods a country can make with everything in use. The axes carry quantities of goods — never price.
| Where the point sits | What it means |
|---|---|
| On the curve | efficient — every worker and machine in use |
| Inside | unemployment or waste — resources sitting unused |
| Outside | unattainable for now — not enough resources or technology |
| Bowed out | opportunity cost rises as you move along — resources are not equally good at both jobs |
| Straight line | opportunity cost constant |
Then decide which move the scenario is asking for. Five scenarios, five different drawings — tap through them:
Animated graph
Watch the graph build step by step in study mode.
| Scenario | What you draw |
|---|---|
| Training, better health, new machines, technology | curve out — two curves, PPC₂ outside |
| War, disaster, skilled workers leave for good | curve in — two curves, PPC₂ inside |
| Nothing spare, one industry grows | along one curve, A → B |
| Unemployment falls, closed factories reopen | inside → on — one curve, nothing new arrived |
| A change in one industry only | pivot — one end moves, the other stays put |
Important: Unemployment falling is not a shift. The resources were there all along — the point moves from inside the curve to on it. Better technology is not a move along. The limit itself has risen, so the whole curve goes out.
🔁 The circular flow of income
Your spending is somebody's wages. Households supply the factors, firms pay income, households spend it — round it goes. Money that leaves the loop is a leakage; money that enters is an injection.
- saving — put aside, not spent (leakage)
- taxes — paid to government (leakage)
- imports — spent abroad (leakage)
- investment — firms buying capital (injection)
- government spending (injection)
- exports — foreigners buying ours (injection)
Income paid out, value produced, total spent — the same money at three points, so income = output = expenditure. That is why Unit 3 measures GDP three ways. Saving only shrinks the flow if it stops at the bank. If firms borrow it and invest, it comes straight back.
✍️ Worked examples
The four shapes this topic is asked in, with new scenarios. Try each one before opening the plan.
A text describes a young founder who borrowed money to open a chain of bubble-tea shops. Define the term entrepreneurship.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now a diagram question. Decide first: does the curve move, or does the point?
A country's car factories have been running at half capacity for two years. A new trade deal brings in orders, and the factories return to full production. Using a production possibilities curve diagram, explain the effect on the country's output.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Animated graph
Watch the graph build step by step in study mode.
Explain how a production possibilities curve can be used to show scarcity, choice and opportunity cost.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Animated graph
Watch the graph build step by step in study mode.
A government raises income tax to cut its deficit. Explain, using the circular flow of income model, the likely effect on national income.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
✅ Quick self-check
Tap each card to check yourself.
Land, labour, capital, entrepreneurship — which income does each earn? Rent, wages, interest, profit. Money is none of them — the machine it buys is capital.
A town uses its last empty plot for a car park. What is the opportunity cost? The next best use of that plot — the park or the housing it did not build. Not the money spent on the car park.
Concert tickets resell at triple the price — micro or macro? Micro. One market. Macro is the whole country — inflation, unemployment, growth.
How does a market answer 'for whom'? By ability to pay — rationing. Whoever pays most gets it. That is the efficiency-versus-equity tension in one line.
A new machine only the car industry can use arrives. What happens to the PPC? It pivots: the cars end of the curve moves out, the other end stays exactly where it was.
Imports rise. Leakage or injection — and what happens to national income? Leakage — the M in S + T + M. More money leaves the loop, so national income falls, unless injections rise to match.
Is a public limited company in the public sector? No — private sector. Public means anyone can buy its shares. The public sector is what the government owns.
Two economists agree a sugar tax cut consumption by 12% — and still disagree. Why? They disagree about whether it was worth it — a judgement, not a number. That is what makes economics a social science.
Exam tips
- Resources = factors of production. A 2-mark define = the category + one more element.
- Opportunity cost = the next best alternative, singular. Never a money figure, never a list.
- Scarcity ≠ shortage ≠ poverty. Equity ≠ equality. Micro or macro: one market, or the whole country?
- PPC axes carry quantities of two goods. Price on an axis is the mark gone.
- Before drawing a PPC decide: does the curve move, or does the point move? Unemployment falling moves the point; technology moves the curve.
- Sketch = the diagram is the whole answer. Explain [4] = the diagram plus two sentences — why it moved, and so what.
- Circular flow: S T M out, I G X in. Equilibrium is the two totals matching. Every arrow needs a head.
- No country is a pure free market or a pure planned economy. On 'which is better', argue what it depends on.