top of page


The economic problem

a) The problem of scarcity

Sun and Teichert (2022) define scarcity as the "basic limitations in economic transactions resulting from the gap between resource availability and individuals' needs". This concept forms the basis for the economic problem, which describes the fact that all people have infinite wants but always have finite needs. Because resources are not unlimited but the population's wants are, choices must be made in an attempt to compromise realistically.

Nobel Prize winning economist Paul Samuelson set out three key questions that are intrinsic to economics. They are as follows:

What goods and services should be produced?

How should the resources in our economy be used to produce these goods and services?

Who should these goods and services be allocated to?

These questions form the basis for choices made in regard to scarcity, as governments must answer them all in order to effectively allocate their finite resources.

b) Renewable and non-renewable resources

By my judgement this is one of the most simple concepts in the economics A level specification. Like with science GCSE, renewable resources can be replenished, whereas non-renewable resources cannot be.

c) Opportunity cost

Opportunity cost is the next best alternative forgone when a choice is made. This refers to the fact that resources can't be used to produce the same goods at exactly the same time, so when a decision is made concerning where these resources should be allocated, there is a cost incurred for the lost opportunity to use those resources elsewhere. Like with ceteris paribus, this term is used ALL THE TIME in the course, so you MUST make sure you learn it properly.

Here's an example to help you understand: If I have £5 I can only buy a football or a basketball in my local shop. Should I choose to buy the football, the opportunity cost is the basketball that I now cannot buy since I have spent all of my money.

d) Economic agents


Economics is broken down into individual agents for ease of comprehension. They fall into three main categories:

Consumers - These are individual people and households. They must decide how to spend their income and which goods and services to buy (incurring an opportunity cost).

Producers - Or otherwise known as firms. They must decide which goods and services to produce and how, and can set their own prices according to market forces.

Governments - Arguably the most important agent in economics, governments have the overall power and say in resource allocation in the economy by enforcing rules and regulations.

e) Factors of production

Similarly to the previous section, economics is also broken down into categories for production factors, of which there are four:

Capital - This is all the man-made factors of production (machinery, robots, etc.). Capital owners receive interest on their land.

Enterprise - The component which ties all the others together. It is the willingness and ability to take the risks associated with investment into production, and usually refers to the business founder/owner.

Labour - This is all the human factors of production, including both physical and mental, paid and voluntary input. The labour (the workers) receive wages in return for their efforts.

Land - This is all the natural resource factors of production such as coal, land, raw materials, etc. Owners of land can receive rent, and loans used to purchase land are returned with interest.

Use the word CELL as a mnemonic device for remembering the four factors of production!

To help revise this, click the button for my condensed flashcards!

bottom of page