1.4

• What is scarcity?

  limited resources in relation to unlimited wants, forcing individuals, firms and governments to make choices
• what is choice in economics?

  because of scarcity, coming agents must choose between competing uses of resources
• choice definition

  choosing between alternatives when making a decision on how to use scarce resources
• what is opportunity cost?

  the next best alternative forgone when a choice is made
• why is opportunity cost important?

  It helps evaluate the true cost of decisions and ensures resources are unused efficiently
• what are the three economic questions?

  • what to produce?
  • how to produce it?
  • for whom to produce?
• what is resource allocation?

  how scarce resources are distributed between competing used to meet as many wants as possible
• what role does the price mechanism play in allocation?

  in a market economy, the price mechanism helps allocate resources based on supply and demand
• what is meant by economic efficiency?

  using resources in a way that maximises output and minimises waste
• what happens if resources are not allocated efficiently?

  there is a waste, unmet wants, or market failure, leading to less welfare in society
• how do governments influence resource allocation?

  • provide public goods
  • impose taxes or subsides
  • regulate monopolies
  • correct market failure
• what is the difference between economic goods and free goods?

  • economic goods are scarce and have an opportunity cost
  • free goods are abundant (e.g air) and have no opportunity cost
• what’s an example of opportunity cost for a government?

  spending on healthcare may mean less spending on education - the forgone option in the opportunity cost
• what is meant by ‘efficient allocation of resources’?

  resources are allocated where thet create the most value or utility, usually where marginal benefit = marginal cost
• What is the opportunity cost for a firm?

  Its the profit it could have earned for the next profitable investments of its time, money or resources
• how does opportunity cost relate to scarcity?

  scarcity forces people to choose, and every choice coming with an opportunity cost - the unavoidable trade-off in a world of limited resources