Section 1 - The Basic-Economic-Problem

Cambridge IGCSE - Economics
LO1 – Basic Economic Problem

2019-2021 - Course Code: 0455
LO1 - Basic Economic Problem

Course Specification
1.1 – Economic Problem 1.2 – Production Factors 1.3 – Opportunity Cost 1.4 – Production Possibility Page 02
Section Topics
1. Basic economic problem: choice • economic problem • factors of production • opportunity cost
and the allocation of resources • resource allocation • choice • production possibility curves.
2. The allocation of resources: how • market and mixed economic systems • demand and supply analysis
the market works; market failure • price elasticity • market failure • social and private costs and benefits
3. The individual as producer, • functions of money • exchange • central banks, stock exchanges and
consumer and borrower commercial banks
• labour market • motives for spending, saving and borrowing.
4. The private firm as producer and • types and sizes of business organisation • demand for factors of production
employer • costs and revenue • profit maximisation and other business goals • perfect
competition • monopoly • advantages and disadvantages of increased scale.
5. Role of government in economy • government as a producer and an employer • aims of government
economic policy • fiscal, monetary and supply-side policies
• types of taxation • possible policy conflicts • government’s influence on
private producers.
6. Economic indicators • price indices • inflation and deflation • employment and unemployment •
GDP, economic growth and recession
• GDP and other measures of living standards.
7. Developed and developing • developed and developing countries • absolute and relative poverty •
economies: trends in production, alleviating poverty • population growth • differences in living standards.
population and living standards
8. International aspects • specialisation • current account of the balance of payments • current
account deficits and surpluses
• exchange rate fluctuations • protectionism and free trade.
Exam Assessment
Key command words you need to know

 Analyse - examine in detail to show meaning, identify
elements and the relationship between them.
 Calculate - work out from given facts, figures or information.
 Define - give precise meaning.
 Describe - state the points of a topic/give characteristics
and main features. Discuss - write about issue(s) or topic(s)
in depth in a structured way.
 Explain - set out purposes or reasons / make the
relationships between things evident / provide why and/or
how and support with relevant evidence.
 Give - produce an answer from a given source or
recall/memory.
 Identify - name/select/recognise.
 State - express in dear terms.
Exam Assessment
Economics can help to explain real-world events, issues and problems,

such as why:
 the most expensive can of Coca-Cola, made for astronauts, is
$1250 per can » one of the world's fastest cars, the Bugatti Veyron,
is priced at a cool $1.7 million (before taxes)
 the price of a bus fare is relatively low
 the average doctor, lawyer, pilot and dentist have high earnings
 private sector firms do not supply street lighting and public roads
 diamonds (a non-essential product) are expensive, whereas water
(a vital good) is not
 farm workers (who harvest products essential for life) are paid low
wages whereas bankers (who produce nothing of real substance)
are paid high salaries
Economics helps to explain everyday issues that occur in a constantly
changing global environment. It is a 'live' subject and you are
encouraged to watch the news and read newspapers to refresh the
case studies you learn in class.
Chapters
1.The nature of the economic problem

2.The factors of production
3.Opportunity cost
4.Production possibility curve
 This section of the syllabus introduces students to
the fundamental economic problem: scarce
resources and infinite wants (desires).
 You will learn about the introductory concepts that
underpin the study of macroeconomics, including
the basic economic problem, scarcity, choice,
factors of production, economic goods and free
goods, opportunity cost and production
possibilities,
Classify these.
Needs Wants
Needs and Wants
 Wants
› Non-essential goods
and services that
people would like to
have.
 Needs › Interests & Tastes
› Essential goods
or services
necessary for
living.
› Satisfy the basic
things for life.
01 – The Nature of the Economic Problem
By the end of this chapter, students should be able to:

 understand the nature of the economic problem
 explain finite resources and unlimited wants
 distinguish between economic and free goods.
The nature of the economic problem: finite resources and
unlimited wants
 In every country, resources are limited in supply and decisions
have to be made by governments, firms (businesses) and
individuals about how to allocate scarce resources to satisfy
their unlimited needs and wants. Definition
This is known as the basic The basic economic
economic problem, which exists problem is concerned with
in every economy: how best to how best to allocate scarce
allocate scarce resources to resources in order to satisfy
satisfy people's unlimited needs people's unlimited needs
and wants. and wants.
 Essentially, economics is the study of how

resources are allocated to satisfy the
unlimited needs and wants of individuals,
governments and firms in an economy.
Unlimited Limited Scarcity

Wants resources
▲ Figure 1.1 - The real cause of the economic problem

 The three main economic agents (or decision

makers) in an economy are:
 individuals or households
 firms (businesses which operate in the private
sector of the economy)
 the government. Definition
 The three basic economic Economic agents are
households (private
questions addressed by
individuals in society],
economic agents are: firms that operate in the
1. What to produce? private sector of an
2. How to produce it? economy and the
3. For whom to produce it? government [the public
sector of an economy).
 Firms and individuals produce goods and services in

the private sector of the economy and the government
produces goods and services in the public sector. For
example, the government might provide education and
healthcare services for the general public.
 All economic agents (governments, firms and
individuals) produce and consume goods and services.
Private sector refers to economic activity of private
individuals and firms. The private sector's main aim is to earn
profit for its owners.
Public sector refers to economic activity directly involving
the government, such as the provision of state education and
healthcare services. The public sector's main aim is to provide
a service.
Activity
Discuss how a private firm producing running shoes would
answer the three basic economic questions.
 Goods are physical items that can be produced, bought
and sold. Examples are furniture, clothing, toothpaste and
pencils.
 Services are non-physical items that can be provided by
firms and paid for by customers. Examples are haircuts,
bus journeys, education, concerts, telephone calls and
internet access.
Goods are physical items such as cars, tables, toothpaste and
pencils.
Services are non-physical items such as haircuts, bus
journeys, phone calls and internet access.
Activity
1. Make a list of the goods and services provided
by the public sector of your economy. Identify
the goods and services which are free to
individuals and those for which you have to
pay.
2. List which goods/services could be provided by
a private firm as well as by the public
(government) sector.
3. Compare and contrast the aims and objectives
of a government-funded swimming pool and a
private health and leisure club.
 Goods Needs are the essential goods and

services required for human survival. These include
nutritional food, clean water, shelter, protection,
clothing and access to healthcare and education.
 All individuals have a right to have these needs met
and this is stated in Articles 25 and 26 of the
United Nations Universal Declaration of Human
Rights, drafted in December 1948.
Needs are goods or services that are essential for our

survival.
Wants are goods or services that are not necessary for
survival but are demanded by economic means to fulfil a
function.
Article 25
 Everyone has the right to a standard of living adequate for
the health and wellbeing of himself and of his family,
including food, clothing, housing and medical care and
necessary social services, and the right to security in the
event of unemployment, sickness, disability, widowhood, old
age or other lack of livelihood in circumstances beyond his
control.
Article 26
 Everyone has the right to education. Education shall be
free, at least in the elementary and fundamental stages.
Elementary education shall be compulsory. Technical and
professional education shall be made generally available
and higher education shall be equally accessible to all on
the basis of merit.
Wants
 Wants are goods and services that are not necessary for
survival but are human desires — that is, things we would
like to have. Wants are unlimited as most people are rarely
satisfied with what they have and are always striving for
more. Wants are a matter of personal choice and part of
human nature.
 World Bank figures suggest that over 3 billion of the world's
inhabitants live on less than $2.50 per day and more than
1.3 billion live in extreme poverty (less than $1.25 a day).
Activity
1. Make a list of your top 10 wants and needs.
2. Are there any 'needs’ that you could actually survive without?
3. Are there any wants that might be considered as needs?
4. Identify a shortage of any good or service in your economy. Explain why
the shortage has occurred.
Economic goods and free goods

 An economic good is one which is limited in supply, such
as oil, wheat, cotton, housing and cars. It is scarce in
relation to the demand for the product, so human effort is
required to obtain an economic good.
 Free goods are unlimited in supply, such as the air, sea,
rain water, sunlight and (to some extent)
public domain webpages.
 There is no opportunity cost in the
production or consumption of free goods.
Economic goods are those which are limited
in supply.
Free goods are goods which are unlimited in
supply, such as air and seawater. Hence, there ▲ An example
is no opportunity cost in terms of their output. of free goods.
Economic goods and free goods

 A free good is not the same as a good that is provided
without having to pay (such as education or healthcare
services provided by the government).
 The latter has an opportunity cost (the money could have
been spent on the provision of other goods and services)
and is funded by taxpayers' money.
► Public Libraries are not free goods

Activity
Make a list of ten goods which are limited in supply
(economic goods) and a second list I of goods which are
unlimited in supply (free goods). How many goods did your
class I think of that are unlimited in supply?
Exam-style questions
1. What is the basic economic problem faced by all
societies?
[1]
A. achieving happiness
B. an inefficient economic system
C. rewarding factors of production
D. scarcity of resources
2. Which product is most likely to be classified as a
free good?
[1]
?Chapter Review Questions

1. What is economics the study of?
2. What is the difference between a need and a want?
3. What is meant by the basic economic problem?
4. What is meant by economic agents?
5. What are the three fundamental questions that all
economies face?
6. What is the difference between goods and
services?
7. What is the difference between the private and
public sector?
8. How do economic goods differ from free goods?
Revision Checklist 
 Economics is the study of how resources are
allocated to satisfy the unlimited needs and wants of
individuals, governments and firms in an economy.
 The basic economic problem is concerned with how
best to allocate scarce resources in order to satisfy
people's unlimited needs and wants.
 Three fundamental questions arise from the basic
economic problem: what, how and for whom should
production take place?
 Economic agents comprise: individuals
(households), businesses (firms) and the
government.
Revision Checklist
 Firms and individuals produce goods and services in the

private sector, whereas the government operates in the
public sector.
 Goods are physical items that can be produced, bought and
sold. Services are non-physical items that can be provided
by firms and governments, and are usually paid for by
customers.
 Needs are the essential goods and services required for
human survival.
 Wants are goods and services that are not necessary for
survival but are human desires. These are infinite.
 Economic goods are limited in supply, whereas free goods
are unlimited in supply and so have no opportunity cost in
terms of output and consumption.
01 – Work Book Questions
1.1 – Economic Problem 1.2 – Production Factors 1.3 – Opportunity Cost 1.4 – Production Possibility
Work Book questions

1. The basic economic problem is ?
A. how to allocate scarce resources to satisfy
unlimited needs and wants.
B. how to satisfy limited wants and needs with
unlimited resources.
C. meeting increased demand for goods and
services with limited resources.
D. the interaction of market forces to satisfy
unlimited needs and wants.
2. An example of a free good is
A. housing. B. public domain web
pages.
3. An olive farm in northern Italy produces organic olive oil

which it sells on its website to specialist shops around
the world. An example of tertiary industry activity is
A. bottling the olive oil.
B. crushing the olives to extract the oil.
C. growing olive trees.
D. selling the oil over the internet.
4. Which is not one of the three basic economic questions

addressed by an economy?
A. For whom should production take place?
B. How should production take place?
C. What production should take place?
D. When should production take place? ?
5. Which term is used to describe non-physical items,

such as haircuts, bus journeys and internet
access?
A. factors of production ?
B. goods
C. opportunity costs
D. Services
6. Define the term public sector.
[2 marks]
_________________________________________
_________________________________________
_________________________________________
7. Using relevant examples, explain the difference

between needs and wants.
[4 marks]
_________________________________________
_________________________________________
_________________________________________
_____________________________________
8. Explain the difference between economic goods
and free goods.
[4 marks]
_________________________________________
?
9. Use examples to explain how goods differ from

services.
[4 marks]
_________________________________________
_________________________________________
_________________________________________
_____________________________________
10.Explain how poverty in the real world is an example
of the basic economic problem.
[4 marks]
_________________________________________ ?
02 – Factors of Production
By the end of this chapter, students should be able to:

 define and provide examples of the factors of
production
 outline the rewards for the factors of production
 explain the influences on the mobility of factors of
production
 understand the causes of changes in the quantity
and quality of factors of production.
Definition
The factors of production refer to the resources
required to produce a good or service, namely land,
labour, capital and enterprise.
Factors of production
 Production of any good or service requires resources,
known as the factors of production, which are divided into
four categories:
 Land - the natural resources required in the production
process, such as oil, coal, water, wood, metal ores and
agricultural products.
 Labour - the human resources required in the production
process, including skilled & unskilled labour.
 Capital - the manufactured resources required in the
production process, such as machinery, tools, equipment
and vehicles.
 Enterprise - the skills a business person requires to
combine and manage the other three factors of
production successfully.
▲ Factors of production: Land, labour, enterprise and capital

Factors of production
 For example, the factors of production required to produce
cans of Coca-Cola are as follows:
 Capital - a factory building, machinery, computers, tools,
and trucks to transport the drinks to warehouses and
retailers.
 Enterprise — the risk-taking and business skills
necessary to organise the production process
successfully, and to motivate workers so they work to the
best of their ability, in the pursuit of profit.
 Labour — people to work on the production Line, perform
administrative tasks, promote the drinks effectively to
customers and manage the company.
 Land — the natural resources required to make Coca-
Cola, such as sugar, water and caffeine
Activity
Consider the resources
(factors of production) required
to deliver an IGCSE Economics
lesson. Discuss whether it is
possible to know which of the
four factors of production is the
most important for economic ▲ What resources are
activity. used to deliver a lesson?
Study Tip
The first letter of each of the four factors of
production spells the word CELL. This is a useful way
of remembering the four factors of production.
Rewards for factors of production

 As the factors of production are productive resources,
each has a reward for its use in the production process:
 The reward for land is called rent. Rental income
comes from the ownership of property, such as
physical and related assets, and is paid by the
tenants of the land resources.
 The reward for labour is called wages and salaries.
Wages are paid to workers on
an hourly basis, such as those
who earn a national minimum
wage (see Chapter 18).
Salaried staff are paid a fixed
amount per month.

 The reward for capital is called interest. If the interest
rate (see Chapter 27) is high, it becomes less
worthwhile for businesses and households to borrow
money for production purposes because the cost of
borrowing is high, and vice versa.
 The reward for enterprise is called profit. This is the
return for the entrepreneur's good business ideas and
for taking the risks in starting up and running the
organisation. Profit is what remains after all business
costs are paid, including payment to the other factors
of production.
 Collectively, the four rewards for the factors of
production are known as income.

 The mobility of factors of production refers to the extent
to which resources can be changed for one another in
the production process.
 For example, farming can be very traditional in some
parts of the world and rely heavily on labour resources.
 However, in other countries, farming is predominantly
mechanised, with a heavy reliance of capital resources.

 Economists usually talk about labour mobility, although factor
mobility can apply to any factor of production. For example:
 Land might be used for various competing purposes,
such as to grow certain fruits and/or vegetables, or to
construct buildings such as housing, hospitals or schools.
 Capital equipment might be used for different purposes
too. For example, the same machinery in the Coca-Cola
factory can be used to produce Coca-Cola, Sprite and/or
Fanta.
 Entrepreneurs can also be mobile. For example, Meg
Whitman, chief executive officer (CEO) of Hewlett-
Packard, was previously a vice president of the Walt
Disney Company and CEO of eBay.
 Labour mobility can be broken down into two categories.
Geographical mobility
 Geographical mobility refers to the willingness and
ability of a person to relocate from one area to another for
employment purposes. Some people may not be
geographically mobile for the following reasons:
 Family ties and related commitments - people may
not want to relocate as they want to be near their family
and friends. There may be other commitments such as
schooling arrangements for children (it can be highly
disruptive to the education of children who have to
move to a new school in a new town or country).
Geographical mobility refers to the extent to which labour is
willing and able to move to different locations for employment
purposes.
Geographical mobility
 Costs of living - the costs of living vary between regions
and countries, so may be too high in another location,
making it uneconomical for a person to relocate.
 For example, a bus driver may find it impossible to
relocate from the countryside to the city because house
prices are much higher in the city and he or she therefore
cannot afford to purchase a home in the city.
 By contrast, a banker may be
offered a relocation allowance to
move to another country and the
potential earnings are much higher,
so the banker has greater
geographical mobility than the bus
driver.
Occupational mobility
 Occupational mobility refers to the ease with
which a person is able to change between jobs. The
degree of occupational mobility depends on the
cost and length of training required to change
profession.
 Developing and training
employees to improve
their skills set improves
labour occupational mobility
(as workers can perform a
greater range of jobs). ▲ Teachers are typically
occupationally mobile
Occupational mobility
 Generally, the more
occupationally and
geographically mobile
workers are in a
country, the greater its
▲ Miners are typically
international occupationally immobile
competitiveness and
economic growth are
likely to be.
Occupational mobility refers to the extent to which labour is
able to move between jobs. Retraining and upskilling help
workers to improve occupational mobility.
Causes of changes in the quantity and quality of factors

of production
 The quantity and quality of factors of production will
change if there is a change in the demand for and/or
supply of land, labour, capital or enterprise. Possible
changes include the following:
 Changes in the costs of factors of production - for
example, higher labour costs caused by an increase in
the national minimum wage would tend to reduce the
demand for labour.
 Net migration of labour (see Chapter 34) will affect
the quantity of labour in the economy. If more people
migrate to a country than emigrate to other countries,
the quantity of labour will increase, ceteris paribus
(Latin for 'all other things remaining equal').
 Government policies can affect the costs of

production, such as through the use of taxes and
subsidies (see Chapter 15). E.g., lower income taxes
can help to create incentives to work, thus increasing
the quantity of labour resources. Complying with
regulations will also tend to increase costs of
production. By contrast, subsidies help to reduce
production costs, thereby increasing output of goods
and services.
 New technologies allow
firms to produce more output.
Higher productivity also
enables firms to cut their
average costs of production.
 Improvements in education and healthcare will

improve the quality of labour as workers become
more valuable to firms. This helps to boost
production.
 Unfavourable weather conditions (such as
severe droughts or flooding) will reduce the supply
of agricultural products. Conversely, good weather
conditions will increase supply, thus increasing
agricultural output.
Activity
In class, discuss why all four factors of production are
required in:
a) the construction of roads and b) haircuts.
1. Which option is not an example of capital as a
resource?
[1]
A. computers
B. factory
C. machinery
D. natural resources
2. Which event is most likely to cause an increase in
the average wage of labour?
[1]
?Chapter Review Questions

1. What is meant by the term 'factors of production'?
2. What are the four factors of production?
3. What are the various rewards for the factors of
production?
4. What is the collective name for the four returns on
the factors of production?
5. What is meant by the mobility of factors of
production?
6. How does geographical mobility of factor resources
differ from occupational mobility?
7. What are the various causes of changes in the
quantity and quality of factors of production?
Revision Checklist
 Factors of production refer to the resources required to

produce a good or service, namely land, labour, capital and
enterprise.
 The return on the four factors of production are rent (land),
wages and salaries (labour), interest (capital) and profit
(enterprise). Collectively, the rewards are called income.
 Geographical mobility refers to the extent to which a person
is willing and able to move to different locations for
employment purposes.
 Occupational mobility refers to the extent to which a person
is able to switch between different jobs (occupations).
 The quantity and quality of factors of production will change
if there is a change in the demand for and/or supply of land,
labour, capital or enterprise.
Work Book questions

1. Production of any good or service requires ?
resources known as:
A. Factors of production. B. production facilities.
C. Land. D. raw materials.
2. What is the generic name for the natural resources
required in the production process?
A. Capital. B. Labour.
C. Enterprise. D. Land.
3. Production of any good or service requires
resources known as:
A. Income. B. Rent.
C. Profit. D. Salaries and
4. Which refers to the willingness and ability of a person

to relocate from one area to another for employment
purposes?
A. geographical mobility
B. incentives to work
C. occupational mobility
D. regional unemployment
5. What is the name given to manufactured resources

required in the production process?
A. Capital
B. Enterprise?
C. Labour?
D. Land? ?
6. With the use of a relevant example, describe the

meaning of Land as a factor of production. ?
[2 marks]
_________________________________________
_________________________________________
______________________________________
7. Explain two causes of changes in the quantity and

quality of factors of production.
[2 marks]
_________________________________________
8. a. Explain what is meant by geographical mobility

of labour as a factor resource.
[2 marks]
_________________________________________
_________________________________________
______________________________________
9. b. Explain why labour, as a factor of production, is

essential in the production process.
[4 marks]
_________________________________________ ?
9. With the use of at least one example,

explain how new technologies might
?
affect the quantity and quality of factors
of production in an economy.
[4 marks]
_______________________________
_______________________________
_______________________________
_______________________________
10. Using relevant examples, analyse how all four factors

of production are needed in the production of a good
or service of your choice.
[6 marks]
___________________________________________
___________________________________________
___________________________________________
___________________________________________
___________________________________________
___________________________________________
___________________________________________ ?
03 – Opportunity Cost
By the end
 define and provide examples of opportunity cost
 understand the influence of opportunity cost on decision
making.
Opportunity Cost
 Opportunity cost is the cost of the next best opportunity
forgone (given up) when making economic decisions.
 Every choice made has an

opportunity cost because in
most cases there is an
alternative.
Opportunity Cost
 Some examples of opportunity cost are as follows:
 The opportunity cost of choosing to study IGCSE
Economics is another IGCSE subject you could be studying.
 The opportunity cost of visiting the cinema on Saturday
night could be the money you would have earned from
babysitting for your neighbour instead.
 The opportunity cost of building an additional airport
terminal is using the same government funds to build public
housing for low-income families.
 The opportunity cost of a school purchasing 100 laptops for
use in classrooms might be the science equipment that
could not be bought as a result.
 The opportunity cost of going to university to study for a
degree is the loss in income that would have been earned if
the undergraduate student had chosen to work instead.
Case Study: US Federal Government Spending

The Federal Ministry of Finance, the US federal government announced
spending of almost $329 billion in its 2017 budget on the following:
 42.2% on labour and social affairs
 11.1% on national defence
 8.2% on transport and digital infrastructure
 6.1% on federal debts
 5.3% on education and research
 4.6% on healthcare
The government raises a finite amount of taxation revenue and must decide
how much of the budget to allocate to each area of public spending. There
is an opportunity cost attached to the decisions made as increased
spending in one area may lead to decreased spending in another.
Activity
Investigate the major components of government spending in your
country, or a country of your choice. Be prepared to share your findings
with others in the class.
The influence of opportunity cost on decision making

 Opportunity cost directly influences the decisions made
by consumers, workers, producers and governments.
Referring to the basic economic problem (see Chapter 1
there are competing uses for the economy's scarce
resources. Thus, there is an opportunity cost when
allocating scarce resources.
 Consumers have limited incomes, so whenever they
purchase a particular good or service, they give up the
benefits of purchasing another product.
 Workers tend to specialise (see Chapter 18) - for
example, as secondary school teachers, accountants,
doctors and lawyers. By choosing to specialise in a
particular profession, workers give up the opportunity
to pursue other jobs and career

 Producers need to choose between competing
business opportunities. For example, Toyota has to
decide how best to allocate its research and
development expenditure in terms of developing its
petrol-fuelled cars or its hybrid electric cars.
 Governments constantly face decisions that
involve opportunity cost. If a government chooses
to spend more money on improving the economy's
infrastructure (such as improving its transportation and
communications networks), it has less money
available for other uses (such as funding education
and healthcare).

 In general, decision makers will choose the option that
gives them the greatest economic return.
 For example, a government might prioritise welfare
benefits over its expenditure on national defence or
repaying the national debt.
Activity
Discuss whether quantitative or qualitative factors
play a bigger role in economic decision making.
To what extent does the concept of opportunity cost
apply to your own decisions about post-16 and
university education?
1. The opportunity costs for a farmer in terms of corn and
wheat production are shown in the following table.
Corn production (units) Wheat production (units)
65 Plus 30
55 Plus 35
Calculate the opportunity cost for the farmer of producing

1 unit of wheat.
[2]
2. Juke bought a new Xbox One games console for $295
but has never used it. The second-hand value of his Xbox
One is $195. What is the opportunity cost of Juke owning
the games console?
3. What is the opportunity cost to the economy if the
government decides to build a new motorway (highway)?
[1]
A. the cost of relocating and compensating residents in
order to build the motorway
B. the money spent on building the motorway
C. the other projects that could have been undertaken
had the motorway not been built
D. the overall cost to taxpayers of financing the motorway
project
Activity
Discuss the costs and benefits of the government building a new
airport. What are the I key opportunity costs of such a decision?
? Chapter Review Questions

1. How is the term 'opportunity cost' defined?
2. What might be the opportunity cost of a student
studying IGCSE Economics?
3. Why do consumers face opportunity costs in
decision making?
4. Why do workers face opportunity costs in decision
making?
5. Using an example, explain why producers (firms)
face opportunity costs in decision making.
6. Using an example, explain why governments face
opportunity costs in decision making.
Revision Checklist
 Opportunity cost is a very important concept in

the study of economics as it affects the
decision making of consumers, workers,
producers and governments.
 Opportunity cost is the cost of the next best
opportunity forgone when making a decision.
 Opportunity cost arises because economic
agents have to make competing choices due
to finite resources. Thus, there is an
opportunity cost when allocating scarce
resources.
Work Book questions

1. Why does almost every economic choice made have an
opportunity cost?
A. In most cases, there is an alternative option.
B. In most cases, there is no alternative option.
C. People have infinite wants.
D. Resources are not allocated efficiently.
2. Which is least likely to be an opportunity cost of studying
economics at university?
A. other things the money could be spent on instead of
going to university
B. the difference in earning potential by attending
university
C. the option to study geography at university
D. the option to work
?
3. From the data below, what is the opportunity cost of 1

kilogram (kg) of potatoes in terms of kilograms of carrots?
Carrots (kg) Potatoes (kg)
65 Plus 25
55 Plus 30
A. 1 kg B. 2 kg C. 5 kg D. 30 kg
4. From the table below, what is the opportunity cost of
producing 1 extra unit of producer goods?
Producer goods (units) Producer Services (units)
30 52
33 43
36 34
?
39 25
A. 1 unit B. 3 units C. 6 units D. 9 units
5. Yann bought a new bicycle for $350 but has never

used it. The second-hand value of the bicycle is
$250. What is the opportunity cost to Yann of
keeping the bicycle?
?
A. $0
B. $100
C. $250
D. $350
6. Define the term opportunity cost.
[2 marks]
_________________________________________
_________________________________________
7. Explain the opportunity cost to society of constructing a new

airport.
[4 marks]
________________________________________________
________________________________________________
________________________________________________
____________________________________________
8. Colleen earns $10.50 an hour, but has chosen to take 2
hours off work in order to attend a school trip with her son to ?
a theatre show. Her ticket costs $15. Calculate the
opportunity cost of Colleen attending this school trip.
9. Sangita pays $30 for each 1-hour driving

lesson taken over a 20-week period. In that
?
time, she could have earned $18 per hour as
a teaching assistant, or $12 per hour working
in a local restaurant. Explain what the
opportunity cost is of her taking the driving
lessons.
[2 marks]
____________________________________
____________________________________
10. Tiga is an outstanding 14-year-old football player who has

been spotted by a top London football club. They have
offered him the opportunity to play full-time, on a ?
scholarship of £35,000 per year for the next 4 years, with
the intention of becoming professional within this time.
Analyse the possible opportunity costs to Tiga if he decides
to take up this offer.
[6 marks]
________________________________________________
________________________________________________
________________________________________________
________________________________________________
________________________________________________
________________________________________________
04 – Production Possibility Curve
By the end
 define a production possibility curve (PPC)
 draw and interpret appropriate PPC diagrams
 explain the significance of the location of production points
on PPC diagrams
 explain the causes and consequences of shifts and
movements of the PPC.
 The production possibility curve (PPC) shows the
maximum combination of any two categories of goods
and services that can be produced in an economy, at
any point in time.
 Essentially, it shows the productive capacity of the
economy. Production Possibility Curve
Fixed Resources
Production Possibility Frontier

Fully employed resources
Special Attention:
In order to use PPF

Technology unchanged
properly, three basic
assumptions have to be
made.
Definitions
The production possibility curve (PPC) represents
the maximum combination of goods and services
which can be produced in an economy, i.e. the
productive capacity of the
economy.
The PPC diagram is a
graphical representation of
the maximum combination
of the amounts of goods
and services that can be
produced in an economy,
per period of time.
Capital goods and Consumer
goods
Consumer goods - goods
and services that are used
by people to satisfy their
needs and wants. e.g. DVDs,
holidays, food etc.
Captial goods - goods that

are used in production of
other goods, e.g. factories,
roads, equipment etc.
Causes and consequences of shifts and movements of

the PPC
Movements along the curve
 For a country to be on its PPC two conditions have to be
met:
 All resources are used - there is no unemployment of
factors of production.
 There is efficiency in
the use of resources –
factors of production
are allocated to their
best use/purpose.
Movements along the curve

 A movement along a PPC results in an opportunity cost.
This means that to produce more of one product, there
must be less of another product.
 In Figure 4.2, a movement along the PPC from points to
point Y means more
consumer goods are
produced (from A to B),
but at the expense of
fewer producer goods
(from C to D).
► Figure 4.2 – Movements

along the PPC
A constant opportunity cost 固

定机会成本–
– productivity for each

resources are same
Shifting the PPF
Imagine:
You are the president of
your own country.
Key Question:
Will you be glad to see the
capability of your
country’s economy stays
where it was a decade
from now?
Economic growth
The increase in the

potential level of real
output the economy can
produce over a period of
time.
Shifting the PPF
The capability of current economy
won’t remain unchanged forever.
Economic Growth will occur with

the followings:
1. Increase in resources
2. Improvement in technology
Outcomes of economic growth:

The PPF shifts outward, which
means that now the economy is
able to do something it could not
once.
Quantity - Changes in
resources: Production Possibilities Fromtier
1. Land 250
2. Labor
(thousands per year)

200
Consumer goods
3. Capital
150
Quality - Changes in
PPF1
technology: 100
4. Invention PPF2
5. Innovation 50
6. Education & Training 0
0 20 40 60 80 100 120 140 160
Capital goods
(thousands per year)
What causes the shifts

in the PPF?
Study the diagram below, which shows the production
possibility curve diagram for Country Y. It produces only two
products: wheat and barley.
1. If Country Y wishes to increase the
production of wheat from W2 to W1
what is the opportunity cost? [1]
A. an increase in barley production
from B1 to B2
B. an outward shift of the PPC Production Possibility Curve
towards point E
C. a reduction in barley production from B2 to B1
D. C to D
2. At which point is there spare capacity in the economy?
Work Book questions

1. Which does not shift the production possibility
curve outwards?
A. higher prices
B. higher productivity levels
C. improved education and healthcare
D. technological advances
2. What do most economies strive to increase?
A. consumer goods
B. opportunity cost
C. productive capacity
D. unemployment ?
3. Which is most likely to cause an

outwards shift of an economy's
?
production possibility curve?
A. a fall in the quality of factors of
production
B. a fall in the quantity of factors of
production
C. an increase in the quantity of factors
of production
D. higher levels of unemployment.
Study the production possibility frontier diagram for

Country X, which produces only two goods, wheat and oil.
Use this diagram to answer Questions 4 to 6.?
4. If Country X wishes to increase the production of wheat
from W2 to W1 the opportunity cost in terms of oil is
A. decrease in oil production from O2 to O1
B. an increase in oil production from O1 to O2
?
C. an outward shift of the
PPC curve to point E
D. C to D
5. At which point is there spare
capacity in the economy?
A. C B. B
C. E D. F
6. Describe two ways in which Country X could increase

the productive capacity of the economy and cause its
PPC curve to shift outwards to point E
[4 marks]
____________________________________________ ?
____________________________________________
____________________________________________
____________________________________________
____________________________________________
____________________________________________
7. Define the term productive capacity.
7. a. Describe what a production possibility curve

(PPC) diagram signifies.
[2 marks]
_________________________________________
_________________________________________
_________________________________________ ?
b. Explain how the concept of opportunity cost is
shown on a PPC diagram.
[4 marks]
_________________________________________
9. Explain the two conditions that must

?
hold for an economy to be operating
on its PPC.
[4 marks]
____________________________
____________________________
____________________________
____________________________
10. With the use of an appropriate diagram, discuss

the consequences of an outwards shift of the ?
production possibility curve for an economy.
[6 marks]
________________________________________
________________________________________
________________________________________
________________________________________
________________________________________
________________________________________

 Students need to be aware of the
significance of the location of
production points, and be able to
explain points under, on and beyond a
PPC. The production points in Figure
4.1 are as follows:
 Point A - all resources are dedicated
to the production of wooden furniture.
 Point B — all resources are dedicated
to the production of olive oil.
 Point C - W1 tonnes of wooden
furniture are produced along with O2
litres of olive oil.
Production Possibility Curve

 Point D – W2 tonnes of wooden furniture and O2 litres of
olive oil are produced.
 Point E - this point is beyond the
production possibility curve and lies
outside the productive capacity of the
economy, so it is currently unattainable.
 Point F - this point is within the
productive capacity of the economy,
so the production of both olive oil
and wooden furniture can increase
without any opportunity cost as
some factors of production are
currently not being used.

 Assume a country can only produce two types of goods:
wooden furniture and olive oil. It has a limited amount of
land, labour and capital.
 In Figure 4.1, if producers wish to increase production of
olive oil from to O1 to O2 then the amount of wooden
furniture manufactured will
have to decrease from W1 PPC
Wooden Furniture
to W2.
 The opportunity cost of (tonnes)
producing the extra O1 to
O2 litres of olive oil is
therefore W1 to W2
tonnes of wooden
Olive Oil (litres)
Production Possibility Curve
A PPC The
increased
amount of
Wooden Furniture
E olive oil is
W1 C
produced at
(tonnes)
the expense
D (opportunity
W2 cost) of
F wooden
furniture
O O1 O2 B
Olive Oil (litres)
▲ Figure 4.1 - The production possibility curve (PPC) diagram

Section 1 - The Basic-Economic-Problem

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Cambridge IGCSE - Economics

LO1 – Basic Economic Problem

LO1 - Basic Economic Problem

Key command words you need to know

Economics can help to explain real-world events, issues and problems,

1.The nature of the economic problem

By the end of this chapter, students should be able to:

 Essentially, economics is the study of how

Unlimited Limited Scarcity

▲ Figure 1.1 - The real cause of the economic problem

 The three main economic agents (or decision

 Firms and individuals produce goods and services in

 Goods Needs are the essential goods and

Needs are goods or services that are essential for our

Economic goods and free goods

Economic goods and free goods

► Public Libraries are not free goods

?Chapter Review Questions

Work Book questions

3. An olive farm in northern Italy produces organic olive oil

4. Which is not one of the three basic economic questions

5. Which term is used to describe non-physical items,

7. Using relevant examples, explain the difference

9. Use examples to explain how goods differ from

By the end of this chapter, students should be able to:

▲ Factors of production: Land, labour, enterprise and capital

Rewards for factors of production

Rewards for factors of production

Rewards for factors of production

Rewards for factors of production

Causes of changes in the quantity and quality of factors

 Government policies can affect the costs of

 Improvements in education and healthcare will

?Chapter Review Questions

Work Book questions

4. Which refers to the willingness and ability of a person

5. What is the name given to manufactured resources

6. With the use of a relevant example, describe the

7. Explain two causes of changes in the quantity and

8. a. Explain what is meant by geographical mobility

9. b. Explain why labour, as a factor of production, is

9. With the use of at least one example,

10. Using relevant examples, analyse how all four factors

 Every choice made has an

Case Study: US Federal Government Spending

The influence of opportunity cost on decision making

The influence of opportunity cost on decision making

The influence of opportunity cost on decision making

Calculate the opportunity cost for the farmer of producing

? Chapter Review Questions

Work Book questions

3. From the data below, what is the opportunity cost of 1

5. Yann bought a new bicycle for $350 but has never

7. Explain the opportunity cost to society of constructing a new

9. Sangita pays $30 for each 1-hour driving

10. Tiga is an outstanding 14-year-old football player who has

Production Possibility Frontier