The Economic Problem


    The problem of scarcity is when there are finite resources but unlimited demand.

    This means that choices have to be made and resources have to be distributed and used optimally.


    Scarcity       –    The shortage of resources in relation to the quantity of human wants.

    • Insufficient resources to supply everyone’s needs and wants.


    Scarcity causes opportunity cost. Opportunity cost is the value of the next best alternative. It relates specifically to the loss of the next best alternative, not just any other alternative. Making an economic choice creates a sacrifice as the next alternative must be foregone. This results in the loss of benefit (often the pleasure rather than the actual cost) that the choice would have provided.


    Opportunity Cost   –    cost (value) of an opportunity (highest value alternative) that has                                        m                                     been foregone when a choice is made


    • If a car was bought for £15,000 and after 5 years the value depreciates by £5,000, the opportunity cost of keeping the car is £5,000 (which could have been gained by selling the car), regardless of the starting price.
    • Opportunity cost is also important to different economic agents such as consumers, producers and governments


    Economic Agent –   A person, company etc that has an effect on the economy of a country,                     m                                for example by buying, selling, or investing.


    Examples of how opportunity cost is important to different economic agents is as such: producers have to pick between buying new/more machinery or hiring more staff whilst governments have to choose which sectors they will spend their money in.


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