Sample Notes: Scarcity, Choice And Opportunity Cost

AS Level Economics – Detailed Notes

Topic 1.1: Scarcity, Choice, and Opportunity Cost

1.1.1 Fundamental Economic Problem of Scarcity

• Definition of Scarcity:
  • Scarcity refers to the basic economic problem that resources are limited but human wants are infinite.
  • It applies to all economic agents: individuals, firms, and governments.
  • Scarcity forces choices to be made about how best to use limited resources.
• Examples of Scarcity:
  • Natural Resources: Oil, water, land
  • Human Resources: Skilled labor, doctors
  • Capital Resources: Machinery, tools
• Resource Types (Factors of Production):
  • Land: All natural resources (e.g., minerals, forests, water)
  • Labour: Human effort (physical and mental)
  • Capital: Man-made resources used in production (e.g., machines)
  • Enterprise: Risk-taking ability to organize other factors to produce goods/services

1.1.2 Need to Make Choices

• Why Choices Must Be Made:
  • Due to scarcity, not all wants can be fulfilled.
  • Economic agents must prioritize which needs or wants to satisfy.
• Choices at Different Levels:
  

  Economic Agent	Example of Choice
  Individuals	Spend on education or entertainment
  Firms	Invest in new machinery or increase wages
  Governments	Fund healthcare or defense programs

• Implications of Choice:
  • Every decision incurs a cost—the next best alternative foregone.

1.1.3 Nature and Definition of Opportunity Cost

• Opportunity Cost:
  • The value of the next best alternative foregone when a decision is made.
  • Not always monetary—can also be in terms of time, utility, or other resources.
• Examples:
  • A student choosing to study economics may give up the opportunity to study computer science.
  • A firm investing in advertising may forgo investment in research and development.
• Key Features:
  • Exists only when choices are made.
  • Affects resource allocation decisions at all levels.
  • Can help evaluate the efficiency of decision-making.

1.1.4 Basic Questions of Resource Allocation

• What to Produce:
  • What goods and services should be produced given scarce resources?
  • Depends on demand, availability of resources, and social priorities.
• How to Produce:
  • What production methods should be used—capital-intensive or labor-intensive?
  • Influenced by resource availability and cost-effectiveness.
• For Whom to Produce:
  • How will goods and services be distributed among the population?
  • Depends on the type of economy (e.g., market economy, command economy)
  • Affected by income distribution, government policy, and social welfare systems

Application and Examples

• Case Study: COVID-19 Resource Allocation
  • Governments faced with scarcity of ventilators, PPE, vaccines.
  • Choices made: prioritize healthcare workers → opportunity cost = delayed treatment for non-COVID patients.
  • Resource allocation decisions shifted toward health sector over others.
• Developing Economies:
  • Scarcity is more acute due to low resource endowment.
  • Choices are more difficult and opportunity costs more significant.

Key Terms Summary

Visual Aid: Basic Economic Problem Diagram

Wants → Unlimited
Resources → Limited
⬇
Scarcity
⬇
Choice
⬇
Opportunity Cost

Evaluation Tips for Exam Answers

• Always link scarcity to the necessity of choice and opportunity cost.
• In data response questions, identify the trade-offs involved in decisions made by firms/governments.
• For essays, evaluate the significance of opportunity cost using both microeconomic and macroeconomic examples.