Scarcity, Choice & the Allocation of Resources (AQA A Level Economics)

Revision Note

Reviewed by: Jenna Quinn

The Basic Economic Problem: Scarcity

The basic economic problem is that resources are scarce
- In economics, these resources are called the factors of production
There are finite resources available in relation to the infinite wants and needs that humans have
- Needs are essential to human life, e.g. shelter, food, and clothing
- Wants are non-essential desires, e.g. better housing, a yacht, etc.
Due to the problem of scarcity, choices have to be made by producers, consumers, workers and governments about the best (most efficient) use of these resources
Economics is the study of scarcity and its implications for resource allocation in society

All Stakeholders in an Economy face the Basic Economic Problem

Consumers	Producers	Workers	Government
In a free market, scarcity has a direct influence on prices The scarcer a resource or product, the higher the price consumers will pay	Producers selling products made from scarce resources will find their costs of production are higher than if they were selling products made from more abundant resources	Workers may want a more comfortable and safer working environment but their employers may not have the resources to create it	Governments have to decide if they will provide certain goods/services or if they will allow private firms to provide them instead Their decision influences the allocation of resources in society

Opportunity Cost Defined

Opportunity cost is the loss of the next best alternative when making a decision
Due to the problem of scarcity, choices have to be made about how to best allocate limited resources amongst competing wants and needs
There is an opportunity cost in the allocation of resources
- E.g. When a consumer chooses to purchase a new phone, they may be unable to purchase new jeans. The jeans represent the loss of the next best alternative (the opportunity cost)

Opportunity Cost in Decision Making

An understanding of opportunity cost may change many decisions made by consumers, workers, firms and governments
Factoring the opportunity cost into a decision often results in different outcomes and so a different allocation of resources

Examples of how the Consideration of Opportunity Costs can Change Decisions

Stakeholder	Example
Consumer	Ashika is wanting to visit her best friend in Iceland She looks at flight prices from London to Reykjavík On Friday night it costs £120 whereas Thursday night is only £50 She is about to book the Thursday flight but then realises that the opportunity cost of saving £60 on a flight is the inability to work on Friday (loss of £130 income) Ashika books the more expensive flight. If she had booked the cheaper flight, it would have cost her the income from the missed day of work (£130) + £50 for the ticket
Worker	Ric has been offered two jobs and is deciding which one to accept Job A offers £400 a month more in salary than Job B, but Job B offers the flexibility of working from home Most people would only consider the actual cost of commuting before they make a decision, which in Ric's case is £40 a week or £160 a month Ric values his free time and decides that each hour he can save in commuting is worth £20 to him (£180 a week), he is considering the opportunity cost of commuting Ric decides to take Job B as the cost of monthly travel (4 x £40) and value of the lost hours spent commuting (4 x £180) adds up to £880 a month

Stakeholder

Example

Consumer

Ashika is wanting to visit her best friend in Iceland
She looks at flight prices from London to Reykjavík
On Friday night it costs £120 whereas Thursday night is only £50
She is about to book the Thursday flight but then realises that the opportunity cost of saving £60 on a flight is the inability to work on Friday (loss of £130 income)
Ashika books the more expensive flight. If she had booked the cheaper flight, it would have cost her the income from the missed day of work (£130) + £50 for the ticket

Worker

Ric has been offered two jobs and is deciding which one to accept
Job A offers £400 a month more in salary than Job B, but Job B offers the flexibility of working from home
Most people would only consider the actual cost of commuting before they make a decision, which in Ric's case is £40 a week or £160 a month
Ric values his free time and decides that each hour he can save in commuting is worth £20 to him (£180 a week), he is considering the opportunity cost of commuting
Ric decides to take Job B as the cost of monthly travel (4 x £40) and value of the lost hours spent commuting (4 x £180) adds up to £880 a month

Examiner Tips and Tricks

Opportunity cost is about the loss of the next best alternative. It is not a monetary amount. Money may well be a factor but opportunity cost is about the loss of the next best choice when making a decision.

Last updated: 13 October 2024

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