Scarcity, choice and the economic problem

Economics is a social science that studies how people, firms and governments make choices under scarcity — human wants are unlimited, but the resources to satisfy them are finite.

Because resources are scarce, every society must answer three basic questions:

• What to produce?
• How to produce it?
• For whom to produce (how is output distributed)?

Key concept — scarcity & choice: every choice involves giving something up. The value of the next best alternative forgone is the opportunity cost.

Factors of production & opportunity cost

Resources used to produce goods and services are the four factors of production:

• Land — natural resources (soil, minerals, sea, forests).
• Labour — human physical and mental effort.
• Capital — man-made aids to production (machines, tools, factories).
• Enterprise — the entrepreneur who combines the other three and bears risk.

Each factor earns a reward: rent (land), wages (labour), interest (capital), profit (enterprise).

Opportunity cost example: if a farmer uses a field to grow wheat, the opportunity cost is the barley (the next best crop) that could have been grown there instead.

What did you give up?

The production possibilities curve (PPC)

The PPC shows the maximum combinations of two goods an economy can produce when all resources are used fully and efficiently.

Increasing opportunity cost: the PPC is usually drawn concave (bowed out) because resources are not equally suited to both goods, so each extra unit of one good costs ever more of the other.

Your turn — opportunity cost

Which factor of production?

Tap a resource, then tap the factor of production it is an example of.

How societies answer the three questions

• Free-market economy — resources are allocated by the price mechanism (demand and supply). Prices act as signals and incentives.
• Planned (command) economy — the government decides what, how and for whom to produce.
• Mixed economy — most real economies: markets plus government intervention to correct failures and pursue equity.

Key concept — intervention: even market-based economies rely on governments for public goods, competition rules and redistribution.

Who decides?

The nine key concepts

The IB course is organised around nine ideas you should weave through every topic:

• Scarcity, choice, efficiency, equity — the core trade-offs.
• Economic well-being, sustainability — the goals of economic activity.
• Change, interdependence, intervention — how economies evolve and interact.

Efficiency vs equity: a frequent tension — an efficient outcome (maximising output) is not always an equitable (fair) one, so governments often trade one against the other.

Match each idea to its definition

Tap a definition on the left, then the term it defines on the right.

Positive vs normative, and models

Economists build simplified models and often assume ceteris paribus (all other things equal) to isolate one effect at a time.

• Positive statements are factual and can be tested (e.g. “a higher price reduces quantity demanded”).
• Normative statements involve value judgements about what ought to happen (e.g. “the government should reduce inequality”).

Watch the wording: words like should, ought, fair or too much usually signal a normative statement.

Fact or value?

Your turn — idle resources

Central themes of the course

The guide highlights recurring real-world issues you should keep returning to:

• Scarcity and the environment — using resources sustainably for future generations.
• Interdependence — households, firms, governments and countries all rely on one another.
• Intervention — when and how governments act to improve outcomes.
• Economic well-being — the ultimate goal: improving living standards.

Sustainability: economic activity today should not compromise the ability of future generations to meet their own needs.

Name the concept

The big ideas to know

You have covered the foundations of the course. Press Finish to see your score.