Economics IGCSE Edexcel - The Economic Problem

The basic Economic Problem is the fact that all resources are finite while people's wants are infinite. As a result, decisions have to be made to allocate scarce resources. To solve this, choices have to be made.

Opportunity Cost if the cost arising from a choice and is the benefits lost from the next best alternative. For example, if you chose to build a motorway instead of a hospital, then the hospital would be the opportunity cost.

To illustrate the opportunity cost, a production possibility curve (PPC) can be used. It looks like this:

The PPC shows the different combination of two goods that can be produced if all resources are used up. For example, at point A, 9 thousand boats and 4 thousand trucks can be made every year. The opportunity cost of moving from point A to B is 2 thousand trucks.

Point D is caused by inefficiencies in production which means resources are wasted.

Over time, the PPC will shift toward point E as production becomes more efficient meaning less resources are wasted.