Scarcity, choice & opportunity cost

The basic economic problem is that resources are scarce (finite) but human wants are unlimited (infinite). Because we cannot have everything, we must choose — and every choice has a cost.

• Scarcity — there are not enough resources to satisfy all wants.
• Choice — scarcity forces consumers, producers and governments to pick between alternatives.
• Opportunity cost — the next best alternative forgone when a choice is made.

Example: if a government spends £1bn on a new hospital, the opportunity cost might be the schools it could have built instead. Opportunity cost is about the one best thing given up, not everything given up.

The four factors of production

Economists group all resources used to make goods and services into four factors of production. Each earns a reward:

Watch out: in economics, capital means man-made aids to production (machines, factories, tools), not money. Money is used to buy capital but is not itself a factor of production. Enterprise is the risk-taking that organises the other three factors.

Reading the PPF

The production possibility frontier

The PPF (production possibility frontier or curve) shows the maximum combinations of two goods an economy can produce when all resources are used fully and efficiently.

• A point on the curve = efficient — resources fully employed.
• A point inside the curve = inefficient — spare capacity / unemployed resources.
• A point outside the curve = unattainable with current resources.

Growth: the whole PPF shifts outward when there are more or better resources, new technology, or a bigger/more skilled workforce — the economy can now produce more of both goods.

Your turn — opportunity cost

Specialisation, division of labour & exchange

Specialisation means a worker, firm, region or country concentrates on producing what it does best. The division of labour breaks production into separate tasks, with each worker doing one.

• Raises productivity (output per worker) and total output.
• Workers become skilled at their task and less time is wasted switching jobs.
• Drawback: repetitive work can be boring, and if one stage fails the whole line can stop.

Because people and countries specialise, they can no longer make everything they need — so they must exchange (trade). Money makes exchange far easier than barter (swapping goods directly), because it removes the need for a "double coincidence of wants".

Link it up: specialisation → higher output → but a need to exchange. Money acts as a medium of exchange that oils the whole process of trade.

Your turn — productivity

Your turn — percentage change

Rewards to the factors

Which factor of production?

Tap an example, then tap the factor of production it belongs to.

Match each term to its meaning

Tap a description on the left, then its matching term on the right.

The big ideas to know

You've covered the core of Introduction to Economics for Edexcel GCSE Economics A. Press Finish to see your score.