1.1.3 The Economic Problem

Edexcel A-Level Economics (9EC0) | Theme 1.1.3

Specification Coverage: This topic examines the fundamental problem of scarcity, opportunity cost, and resource allocation. Students must understand how scarcity forces choices at individual, firm, and government levels, and analyze the implications for economic decision-making using contemporary examples.

The Fundamental Problem of Scarcity

Scarcity exists because unlimited human wants exceed limited resources. This creates the basic economic problem:

Exam Technique: Use the acronym "FIG" to remember the 3 decision-makers: Firms, Individuals, Governments. Always specify which level you're analyzing.
Factor Definition 2024 Global Example
Finite Resources Limited factors of production (land, labor, capital, enterprise) Semiconductor shortage: 169 industries affected (2024)
Infinite Wants Unlimited human needs/desires Global consumer spending reached $62tn (2023)
Price Mechanism Scarcity → Higher prices Lithium prices +450% (2020-2024) due to EV demand
Resource Crisis: The EU Critical Raw Materials Act (2023) identifies 34 scarce resources, with lithium and rare earths demand projected to increase 12-fold by 2030, highlighting global scarcity pressures.

Factors of Production

Factor Definition Renewable Example Non-Renewable Example
Land Natural resources Wind energy (UK: 28% of electricity) Oil (BP estimates 50 years of reserves)
Labor Human effort Skills training (Germany's dual education) Demographic timebomb (Japan's 29% over 65)
Capital Manufactured aids 3D printing reuse Obsolete machinery (UK steel plants)
Enterprise Risk-taking Circular economy startups Single-use business models

Key Evaluation

Scarcity is relative not absolute: - Water scarcity affects 40% of global population, yet Canada has 20% of world's freshwater - 821 million people face food scarcity while 1/3 of food is wasted

Opportunity Cost in Practice

Opportunity cost is the value of the next best alternative foregone when making economic decisions.

Decision-Maker Choice Opportunity Cost Quantitative Impact
Consumer Buy iPhone 15 (£999) Holiday budget sacrificed Equals 3 months of groceries (UK average)
Firm Tesla invests $5bn in Berlin Gigafactory Delayed battery R&D Competitors gain 18-month tech lead
Government UK HS2 funding (£71bn) 20 new hospitals not built NHS waiting lists grow by 400,000
Analysis Tip: High-achieving students quantify opportunity costs. E.g., "The UK's 2023 defence spending increase to 2.25% of GDP created an opportunity cost of £6bn in foregone education funding."

Production Possibility Frontiers (PPFs)

PPFs visually demonstrate scarcity and opportunity cost:

Real-World PPF: Ukraine's wartime economy (2023): - Military goods increased to 35% of GDP (from 5%) - Consumer goods production fell by 40% - Resulted in 30% GDP contraction
PPF Scenario Economic Interpretation Example Opportunity Cost Ratio
Point Inside Curve Resource underutilization UK productivity gap (16% below G7 average) Potential output lost: £54bn/year
Point On Curve Efficient allocation German manufacturing (85% capacity use) 1 car = 3,000 car parts
Curve Shift Outwards Economic growth China's tech investment (+7% productivity) 1% R&D spend → 0.3% GDP growth

Exam Preparation Toolkit

Recent Exam Questions:
  1. "Evaluate the view that opportunity cost is the most significant concept in economic decision-making" (Edexcel 2023, 25 marks)
  2. "Analyse how production possibility frontiers illustrate the basic economic problem" (Edexcel 2022, 20 marks)
  3. "Assess whether governments face greater scarcity problems than individuals and firms" (Edexcel 2021, 25 marks)

Advanced Evaluation Framework

When evaluating scarcity issues, consider:

Perspective Short-Term Impact Long-Term Impact Policy Solution
Individual Budget constraints Career/skill choices Lifelong learning (UK Skills Fund)
National Fiscal deficits Infrastructure decay PPPs (UK's £30bn private finance)
Global Trade wars Climate change Circular economies (EU 2035 target)
Examiner's Insight: In 2023, only 32% of candidates could effectively apply opportunity cost to government decisions. Top scripts referenced: UK's Net Zero delay (opportunity cost of climate damage vs. economic growth), and US CHIPS Act ($52bn semiconductor investment vs. social spending).