Scarcity, Choice and Opportunity Cost

The economic problem

Economics begins with one fact that never goes away: human wants are unlimited, but the factors of production — land, labour, capital and entrepreneurship — are finite. That gap is scarcity, and scarcity is what forces every household, firm and government to make a choice.

Because resources are scarce, every society must answer three questions: what to produce, how to produce it, and for whom the output is distributed. The last question is where equity enters; the first two are where efficiency is decided.

Opportunity cost

The opportunity cost of a choice is the value of the next best alternative forgone. It is not the sum of every alternative you gave up, and it is not the same thing as the money you paid. A resource with no alternative use has an opportunity cost of zero; a resource with many uses has an opportunity cost equal to its single best rejected use.

Free goods and economic goods

A free good has zero opportunity cost of production — nothing is given up to obtain another unit. An economic good is scarce, so producing one more unit always costs something else. Almost every good studied in this course is an economic good, and climate change is the story of what happens when a good long treated as free turns out to be scarce.

The nine central concepts

IB Economics is examined through nine concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence and intervention. Examiners award marks for using a concept as a lens on a real situation, not for reciting the list.