A) The problem of scarcity – unlimited wants and finite resources

Resources are scarce, however wants are unlimited. This creates a problem because there are only finite resources available and therefore not all wants can be satisfied.

As a result of this, decisions need to be made about what goods and services are produced, how they are produced and for whom they are produced. Economics can be used as a tool when choosing between the competing demands placed on scarce resources.

For example, in a market economy money is one of the main ways in which goods and services are rationed. A person may want to buy a particular good or service, but they will only be able to do so if they can afford it.

B) The distinction between renewable and non-renewable resources

Renewable resources are resources that are replaced at the same rate, or faster, than they are being consumed. For example, solar energy is renewable because using it does not cause the resource to run out.

This is in contrast to non-renewable resources, which are consumed faster than they can be replaced by natural processes. Examples include oil and coal.

Pressure on non-renewable resources may increase as the population grows and incomes rise, as this can increase demand for goods and services. This makes it increasingly important to use scarce resources efficiently and minimise unnecessary waste.

The questions of what, how and for whom goods and services should be produced therefore need to be considered when resources are allocated.

C) The importance of opportunity cost to economic agents

Opportunity cost is the value of the next best alternative foregone. It is what an economic agent gives up as a result of making a particular choice.

Choices have to be made because resources are scarce while wants are unlimited. Therefore, whenever a choice is made, there is an opportunity cost.

For example, a government has a limited budget which it needs to allocate between different areas. If it increases spending on healthcare, it may have less money available to spend on education. The opportunity cost of the additional healthcare spending is the next best use of that money which has been given up.

Consumers also face opportunity costs when making decisions. For example, a consumer may have to choose between buying designer clothes or a textbook. If they choose the designer clothes, the textbook may represent the opportunity cost of that decision.

Producers also have to make similar choices. For example, a firm may have to decide whether to use additional profits to invest in new capital goods or to increase the dividend paid to shareholders. Choosing one option means giving up the benefits that could have been gained from the other.

Opportunity cost is therefore important for consumers, producers and governments whenever they decide how scarce resources should be used.