1.1.4 Scarcity, choice and the allocation of resources Why did you choose Economics as an A-Level? What other options were there? Why didn’t you choose Economics plus the alternative options? Y1: Economic methodology and the economic problem AS: E CONOMIC METHODOLOGY AND THE ECONOMIC PROBLEM

1.1.4 S CARCITY, CHOICE AND THE ALLOCATION OF RESOURCES  The fundamental economic problem is scarcity and that it results from limited resources and unlimited wants  Scarcity means that choices have to be made about how scarce resources are allocated between different uses  Choices have an opportunity cost Recap: What is the basic economic problem? Why do choices have to be made?

W HAT DO ECONOMISTS MEAN BY THE ‘ ECONOMIC PROBLEM ’?  People have unlimited wants  However, there aren’t enough resources available to supply all of these wants  This creates the economic problem of scarcity  The ‘economic problem’ occurs when there are finite resources available to supply infinite wants i.e. scarcity  Therefore, choices have to be made Examples of scarcity. Can you add any recent examples that you have seen in the media? Explain how the economic problem can be applied to education in the UK.

O PPORTUNITY COST What do you think is meant by the term opportunity cost? Can you write a definition?

O PPORTUNITY COST  Opportunity cost can be defined as the benefit lost of the next best alternative when making a choice  As all resources are scarce we must make choices in order to allocate these resources  There are always competing alternatives when making choices e.g. should I buy a Pepsi or a Fanta?  If I buy a Fanta I have lost the benefit of the closest alternative, a Pepsi  There is an opportunity cost for all decisions made by economic agents The opportunity cost of HS2. What would you choose? Explain the role of the different factors of production as economic resources.

T RADE - OFFS Opportunity cost is the cost of the next best alternative However there may be a range of alternatives all of which have been given up All of these alternatives are referred to as ‘trade-offs’ In pairs: Write a definition of the term trade-off Support your definition with one example From your own experience From a government’s perspective From within a business Why do ‘trade-offs’ exist? Remember to show off your economic terminology What are the trade-offs to the Government of student fees?

A PPLYING THE THEORY Gareth and his wife Liz own an allotment. Gareth wants to just grow fruit and veg. Liz wants to also grow flowers. Can they do both? How should Gareth and Liz decide how to allocate space in the allotment? Should they grow just fruit and veg, just flowers, or a combination of both?

T HE USEFULNESS OF THE CONCEPT OF OPPORTUNITY COST  Can be applied to a number of empirical case studies  What, how and for whom a product should be produced  How to use scarce resources e.g. government spending  Useful in diagrammatic analysis e.g. production possibility diagrams  Evaluative – always requires a judgment that builds on prior analysis and application