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:
- "Evaluate the view that opportunity cost is the most significant concept in economic decision-making" (Edexcel 2023, 25 marks)
- "Analyse how production possibility frontiers illustrate the basic economic problem" (Edexcel 2022, 20 marks)
- "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).