4.1.1.4 Scarcity, choice and the allocation of resources Flashcards
What is the fundamental economic problem?
The fundamental economic problem is scarcity, which arises because resources are limited while wants are unlimited.
Why does scarcity force choices to be made?
Scarcity forces choices because there are not enough resources to satisfy all unlimited wants, so decisions must be made about how to allocate resources.
What is opportunity cost?
Opportunity cost is the value of the next best alternative forgone when a choice is made. It represents what you give up to pursue a certain option.
Provide an example of scarcity and choice.
If you have £1 and must choose between a chocolate bar and a packet of crisps, scarcity of money forces you to make a choice. The opportunity cost of choosing crisps is the chocolate bar.
How is opportunity cost calculated in the example of a car?
If a car bought for £15,000 depreciates by £5,000 over 5 years, the opportunity cost of keeping the car is £5,000 (the amount that could have been gained by selling it).
Why is opportunity cost important to economic agents?
Opportunity cost helps consumers, producers, and governments make informed decisions by evaluating the trade-offs of their choices.
What is an example of opportunity cost for producers?
A producer might choose between hiring extra staff or investing in a new machine. The opportunity cost of hiring staff is the potential benefits of the new machine, and vice versa.
Capital vs Labour-intensive production
What is an example of opportunity cost for governments?
A government might choose between spending more on the NHS or on education. The opportunity cost of funding the NHS is the potential benefits of investing in education.
Why can’t governments or producers do everything they want?
Because resources are finite, governments and producers must prioritize and allocate resources to the most valuable outputs, which involves trade-offs.
What does it mean to allocate resources optimally?
Allocating resources optimally means using scarce resources in the most efficient way to maximize satisfaction or output, given the trade-offs and opportunity costs.
How does scarcity affect consumers?
Scarcity forces consumers to make choices about how to spend their limited income, balancing their wants and needs while considering opportunity costs.
What is the relationship between scarcity and opportunity cost?
Scarcity necessitates choices, and every choice has an opportunity cost, which is the value of the next best alternative that is sacrificed.
Why are wants considered unlimited in economics?
Wants are unlimited because human desires for goods, services, and experiences are insatiable, while resources to fulfill them are limited.
What is the role of choice in economics?
Choice is central to economics because scarcity requires individuals, firms, and governments to decide how to allocate limited resources among competing uses.
How does opportunity cost influence decision-making?
Opportunity cost helps decision-makers evaluate the benefits of their choices relative to what they must give up, ensuring resources are used efficiently.
