The economic problem

 A) The problem of scarcity – where there are unlimited wants and finite resources:

Resources are scarce, however wants are unlimited. This is a problem due to the fact that there are finite resources and therefore not all wants can be satisfied. As a result of this, decisions need to be made what, how and for whom goods and services are produced. Economics can be used as a tool when choosing between the competing demands placed on finite resources. For example, the most common way that goods/services (resources) are rationed is through the use of money. Only those who can afford a good/service are able to use it despite many more that may want to use it.


B) The distinction between renewable and non-renewable resources:

Renewable resources are those that are being replaced the same or faster than they are being consumed. For example, solar energy would be classed as renewable due to the fact that it can be used without the effect of it running out. This is in contrast to non-renewable resources which are being consumed faster than they’re being replaced by natural means. An example of this may be oil or coal which is both being consumed faster than they’re being replaced. This is especially the case due to growth in population as well as rising incomes of existing population thus putting more pressure on these non-renewable resources. This makes it even more important to fully exploit these resources and minimise wastage. Therefore, the question of how, why and for whom goods and services are provided needs to be answered before allocating resources.


C) The importance of opportunity costs to economic agents (consumers, producers and government):

Opportunity cost is the cost of the next best alternative forgone. This is what the Economic agent is losing as a result of making a certain choice. These choices have to be made due to the fact that resources are scarce but wants are unlimited. Therefore, there is always and opportunity cost when choices are made. An example of this is when the government are allocating their budgets on different resources e.g. an increase in spending on health may leave them with less money to spend on education. The opportunity cost is the reduction on education and the costs that are associated with this e.g. a reduction in the quality of the labour force. Consumers experience opportunity cost with every decision that they make. For example, should a consumer spend money buying designer clothes or a textbook? The opportunity cost for the consumer of buying designer clothes would be the textbook. Further costs may occur such as a poorer grade. Rational consumers will always try to make the decisions which have the lowest opportunity cost. An example, of opportunity cost for a producer may be whether they should increase spending on capital goods or increase the dividend to shareholders.