Key Idea: Topic 1.1 introduces the central problem in economics — scarcity — and the key concepts that flow from it: opportunity cost, the production possibilities curve (PPC), free vs economic goods, and the three basic economic questions every society must answer.
✅ Core definitions
- Scarcity
- Unlimited wants + limited resources = choices must be made. The central problem in all of economics.
- Factors of production
- The four inputs: land (natural resources), labour (human effort), capital (machines/tools — NOT money), entrepreneurship (risk-taking, organising).
- Opportunity cost
- The next best alternative forgone when a choice is made — not all alternatives, just the single best one you gave up.
- Free good
- A good with no opportunity cost — naturally abundant (air, sunlight). No resources needed.
- Economic good
- A good that is scarce — requires resources to produce and therefore has an opportunity cost.
Capital means machines and equipment, NOT money. Scarcity is permanent (unlimited wants vs limited resources). Shortage is temporary (a market condition that prices can fix).
📊 The Production Possibilities Curve (PPC)
- On the curve = productively efficient (all resources used)
- Inside the curve = inefficient (unemployment or waste)
- Outside the curve = currently unattainable (not enough resources/technology)
- Curved (concave) shape = increasing opportunity cost — each extra unit costs more of the other good
- Outward shift = economic growth (more resources, better technology, investment, education)
- Inward shift = loss of resources (war, natural disaster, emigration)
⚖️ Opportunity cost and trade-offs
- Every choice has an opportunity cost — individuals (spend on A or B), firms (invest or save), governments (hospitals or schools)
- The PPC shows trade-offs visually: moving along the curve means producing more of one good and less of the other
- Government trade-offs: equity vs efficiency, growth vs sustainability, low inflation vs low unemployment
❓ The three economic questions
- What to produce? — which goods and services, in what quantities
- How to produce? — labour-intensive or capital-intensive methods
- For whom to produce? — how is output distributed across the population
🏛️ Economic systems
Market economy: Decisions by individuals/firms via the **price mechanism**. Consumer demand determines what to produce. Efficient but can cause inequality. No pure example exists.
Planned economy: **Government** decides all three questions centrally. Social needs determine what to produce. More equal but often inefficient. Historical: USSR, Cuba, North Korea.
- Mixed economy — combination of market forces and government intervention. ALL real-world economies are mixed
- The debate is about HOW MUCH the government should intervene, not whether it should
💲 The price mechanism
- Signalling — high prices signal scarcity or high demand
- Incentivising — high prices encourage more supply and less demand
- Rationing — prices allocate scarce goods to those willing and able to pay
- Limitations → market failures (public goods, externalities, information failure, market power, inequality) justify government intervention
In exams: always state opportunity cost precisely. 'The opportunity cost of producing 10 more cars is 20 units of wheat forgone.' Use numbers from the data if provided.