1.4 Scarcity, Choice And The Allocation Of Resources

Question 1

What is the basic economic problem?

Answer 1

• The basic economic problem is scarcity.
• Wants are unlimited and resources are finite, so choices have to be made.
• Resources have to be used and distributed optimally.

Question 2

Define opportunity cost

Answer 2

• The opportunity cost of a choice is the value of the next best alternative forgone.

-In the other example, the opportunity cost of choosing the crisps is the chocolate bar

Question 3

What is the importance of opportunity cost?

Answer 3

• Opportunity cost is important to economic agents, such as consumers, producers and governments.
• For example, producers might have to choose between hiring extra staff and investing in a new machine.
• The government might have to choose between spending more on the NHS and spending more on education.
• They cannot do both because of finite resources, so a choice has to be made for where resources are best spent.