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The economic problem
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Economics starts with one big problem: we want more than we can have. So we must make choices.
Scarcity
Human wants are unlimited, but the resources to satisfy them are finite (limited).
This is scarcity, the basic economic problem. Because of scarcity, choices must be made about how to use resources.
This is scarcity, the basic economic problem. Because of scarcity, choices must be made about how to use resources.
Opportunity cost
Opportunity cost is the value of the next best alternative given up when a choice is made.
Example: you spend £20 on a concert ticket instead of a new game. The opportunity cost is the game.
Example: you spend £20 on a concert ticket instead of a new game. The opportunity cost is the game.
Who faces opportunity cost?
Consumers: spending on one thing means not buying another.
Producers: using a factory to make one product means not making another.
Government: spending on new hospitals may mean less spending on schools or roads.
Producers: using a factory to make one product means not making another.
Government: spending on new hospitals may mean less spending on schools or roads.
A government spends £2 billion on a new railway. Its next best choice was building schools. What is the opportunity cost?
- Opportunity cost is the next best alternative given up.
Answer: The schools that could have been built
Scarcity: unlimited wants, finite resources, so choices are needed. Opportunity cost is the next best alternative forgone. It affects consumers, producers and governments.
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