A Level Economics: Understanding Scarcity as the Central Economic Problem (Theme 1.1)
Most students in Junior College (JC) end up sitting for the A Level Economics exams, be it at the H1 or H2 Level. While many have not had exposure to the subject prior to entering JC, students typically grow to realise that the A Level Economics syllabus is extremely useful, training them to think critically as well-informed individuals about global affairs and various economic fundamentals. Indeed, mastering A Level Economics puts students in good stead for their many endeavours in the future––careers in business, finance and even marketing require a strong understanding of consumer behaviours in relation to how the economy functions.
So this begs the question: What must students do to develop a good foundation for excelling at A Level Economics? The first and most important thing, of course, is to understand, master and learn how to apply key concepts highlighted in the syllabus. The A Level Economics syllabus is structured systematically––the concepts you learn throughout the two years are built on one another. This means that your understanding of one topic necessarily affects your understanding of other topics. The first theme of A Level Economics for both H1 and H2 students, Scarcity as the Central Economic Problem, underlies the entire syllabus. It is hence imperative that you understand it to develop a strong foundation, which will make the rest of A Level Economics considerably easier to grasp. In this article, Zenith, Singapore’s top Economics tuition center, breaks down Scarcity, the Central Economic Problem (Fig 1) for you.
Fig 1. Overview of Theme 1.1: Scarcity as the Central Economic Problem, as in the A Level Economics syllabus provided by SEAB
So what exactly is Scarcity? In Economics, Scarcity is defined as a situation whereby unlimited human wants cannot be satisfied by the limited resources available.
On this note, it is important to remember that in Economics, terms have specialised meanings. Zenith’s quick tip for showing off your knowledge during the A Level Economics exams is to make appropriate use of technical jargon! Your ability to use these theoretical terms reflects a good understanding of and capacity to discuss key concepts in an academic setting.
Following this line of thought, it is hence inappropriate to replace the term “Scarcity” with unspecialised, common, everyday words such as “not enough”, “shortage”, “insufficient” or any other similar synonyms. On a conceptual level, Shortage is also not the same as Scarcity. To put it simply, Scarcity, unlike Shortage, is rarely eliminated. This is because it is almost impossible for our limited resources to become unlimited. It is also similarly almost impossible for our unlimited desires to become limited.
Okay, so what are “unlimited wants” and “limited resources”?
Unlimited Wants: As humans, we are always seeking higher levels of consumption. For instance, as a fresh graduate, you might only be able to afford a Nissan car. However, as your income rises, it is likely that you will want to acquire a Mercedes-Benz car. In the future, you might even want a Ferrari sportscar! You might not have such desires now, as you’re focusing all your attention on the A Level Economics exams, or you might feel that future you will be satisfied with just having a Nissan car. However, the truth is that a majority of Economic actors will desire to improve their lives in material terms if they have the means to do so.
Limited Resources: From a material perspective in Economics, humans’ unlimited wants are to be satisfied by the consumption of goods (e.g. clothes, bags, food) and services (e.g. visiting the dentist, banking). These goods and services are produced with resources:
Natural resources can be categorised as renewable and non-renewable sources. Renewable sources (e.g. wind) are replenished at a fast enough rate for sustainable economic extraction. Non-renewable resources (e.g. fossil fuels) are not replenished at a fast enough rate for sustainable economic extraction.
Labour refers to any human effort required for producing goods and services.
Capital can be understood as physical assets (e.g. machines in factories, equipment at construction sites) which are used in production. They do not satisfy wants directly but are necessary for producing goods and services demanded by consumers.
Given that these resources are limited, while desires are unlimited, the problem of Scarcity becomes prominent. It guides decisions by all Economic actors––producers, consumers and governments. This is why it is dubbed as the Central Problem of Economics. Be it in Macroeconomics or Microeconomics, most of what you learn from the A Level Economics syllabus is founded on Scarcity. The concept is particularly applicable to Theme 2: Markets, and Theme 3: The National Economy, where you will study how Economic actors attempt to overcome the problem of Scarcity. At Zenith, our team of dedicated educators meticulously curate a JC Economics tuition programme which clearly demarcates the key themes in the A Level Economics syllabus in relation to one another. Tutors also provide cheat sheets that identify how important concepts can be appropriately applied to achieve perfect answers during the A Level Economics exams.
Before you reach Theme 2 and Theme 3, however, you need to understand the principle of Choice. It is the theoretical concept that guides how all Economic actors make their decisions. This is how Choice can be easily understood:
First, there is the premise: resources are limited and hence scarce. Each resource has multiple uses. For instance, a piece of land can be used for building a new shopping mall, or a new block of flats, or a new park. This means that individuals and societies must make choices––what should an available resource be used for? Ideally, the choice made enables the highest possible level of satisfaction. Economic actors are hence constantly engaged in the process of making choices. In addition to thinking about Choice as a means of satisfying wants, Economic actors often consider the costs of satisfying their choices. This is where the concept of Opportunity Cost becomes relevant.
Opportunity Cost is the cost of making a choice, measured in terms of the next-best alternative which has been foregone. Again, because all Economic actors are affected by the problem of Scarcity, they are also faced with the problem of Opportunity Cost. For instance, by deciding to build a shopping mall on an empty piece of land, the government forgoes the next best alternative of building, say, a block of flats. Another instance could be that a consumer gives up the alternative of purchasing a MacBook Pro when he purchases an ASUS Zenbook with the limited budget he has. Or, a producer who decides to spend the $500 he has on manufacturing peanut butter will give up the alternative of manufacturing chocolate spread instead. In other words, there is always opportunity cost incurred in situations of Scarcity as the available resources are insufficient to meet all the wants a person could have.
The only exception where there is zero Opportunity Cost incurred is in the case of free goods. Free goods come in a quantity whereby there is more than enough of it to do everything that consumers desire or need for it to do. This means that consumers need not forgo their next best alternative when enjoying this good––in other words, free goods provide the satisfaction of wants and needs without Opportunity Cost. Examples of free goods are air and sunlight. Everyone needs air to keep them alive, and it is in such abundance that it is able to do so. All other goods which revolve around the concept of Scarcity are called Economic goods. There is a limited quantity of them and Opportunity Cost is incurred when the good is provided.
Naturally, the next question we ask then is: how is an exact value derived in relation to Opportunity Costs?
Here, the Law of Increasing Opportunity Cost becomes relevant. The Law of Increasing Opportunity Cost states that, in the process of producing an increasing amount of a particular good, larger and larger quantities of the next best alternative good has to be given up. This means that the Opportunity Cost increases as more and more of a good is produced.
For instance, in an alternate universe where Nike and Apple are owned by the same person. One day, the owner of Nike and Apple decides that he would like to increase the production of iPads. Therefore, he redeploys workers from Nike, who make AirForce 1 shoes, to Apple. This means that Nike loses workers who are skilled at making AirForce 1 shoes and Apple gains workers who are not quite skilled at assembling iPads, as they have no experience in the job. For every additional iPad assembled, we are losing more and more units of Nike AirForce 1 shoes. The Opportunity Cost of producing iPads, measured in terms of Nike AirForce 1 shoes, is hence increasing.
Thus far, we have covered the basic concepts of Scarcity––the above is all you need to know for your A Level Economics exams. Now, the problem is, how do we present all this information in diagrams? The A Level Economics syllabus stresses candidates’ abilities to express their knowledge in easy-to-understand diagrams. For the theme of Scarcity, we have the Production Possibility Curve (PPC).
The Production Possibility Curve (PPC) is a graph that illustrates all the different maximum attainable combinations of output which can be produced by a particular economy with all its available resources, when they are utilised fully and efficiently, at the current state of technology. It pictorially represents the relationship between the concepts of Scarcity, Choice and Opportunity Cost.
Fig 2. Concave PPC
The standard PPC you see is usually concave to the origin. This is due to the Law of Increasing Opportunity Cost. In Fig 2, it is clear, from the marked point on the graph, that, as the number of units of Good A produced increases, fewer and fewer units of Good B are produced. In other words, more and more units of Good B are being sacrificed for the production of Good A.
Fig 3. Straight Line PPC
As in the study of Mathematics, a straight-line graph indicates a linear, constant relationship between two variables. A straight line PPC, as shown in Fig 3, illustrates constant Opportunity Cost. This means that the Opportunity Cost remains the same instead of increasing with every additional unit of a good produced. For instance, referring to Fig 3, the number of units of Good B sacrificed for the production of Good A remains the same as the number of units of Good A produced increases. Opportunity Cost is only constant when all resources are homogenous (i.e. equally skilled and equally suitable in the production of all goods, which makes them transferable). Referring to the earlier example of Nike workers being transferred to Apple, this would mean that all the Nike workers would be as proficient in assembling iPads as they are in making Nike AirForce 1 shoes. Unfortunately, as you’d have probably guessed by now, this is unlikely to be true in real life. It is almost impossible for resources to be homogenous in reality.
Aside from illustrating Opportunity Costs, the PPC can also demonstrate the impacts of economic growth on an economy. Economic growth is defined as an increase in a particular economy’s level of output (also measurable by the Gross Domestic Product) over time.
Fig 4. PPC of an under-producing economy undergoing actual growth
At the A Level Economics exams, you will need to know the concept of actual growth. Actual growth occurs when current output levels increase. In Fig 4, the original point of production, as marked by X, is within the PPC. This means that the economy is underutilizing its resources, as output levels will be on the PPC if resources are being utilised efficiently and fully. When the output levels move from point X to a point on the PPC, as marked by the direction of the red arrow in Fig 4, actual growth occurs.
Potential growth, on the other hand, is defined as the expansion of an economy’s productive capacity over time. Productive capacity increases when the quantity and/or quality of resources available increase the production of one or both goods. There are two types of potential growth that can occur. The first is characterised by an outward shift in the PPC (Fig 5), where the resources available increase the production of both goods. The second is characterised by a pivotal shift in the PPC (Fig 6), where the resources available increase the production of only one good.
Fig 5. PPC of an economy achieving potential growth (Type 1)
Fig 5. shows the type of potential growth which occurs when the resource is suitable for the production of both Good A and Good B. This means that there is an equal increase of production capacity for both goods, not just Good A or Good B. Therefore, the PPC experiences an outward shift.
Fig 6. PPC of an economy achieving potential growth (Type 2)
On the other hand, Fig 6 demonstrates what happens when the resource is suitable only for the production of Good B. The productive capacity for Good B increases, while the productive capacity for Good A remains the same, as seen from how the PPC experiences only a pivotal shift. This means that, as seen in Fig 6, if the producer decides to produce only Good A, there will be no possible increase in the output level, as Good A’s productive capacity has not expanded.
The last thing to consider is intended and unintended consequences in making decisions for economic growth. For example, Good A might increase the standard of living of consumers in the present. On the contrary, Good B might only increase the standard of living of consumers in the future. A government might thus choose to produce more of Good A––their intended consequence is to improve the current standard of living. However, the unintended consequence of this decision will be that the future standard of living might not increase as much as compared to if more of Good B was produced now instead of Good A. For instance, deciding to produce more fast fashion clothes may meet consumer demands and increase producer profits in the present. However, an unintended consequence in the future will be the environmental damage that is caused by today’s environmentally-unfriendly clothing production.
As established earlier, these intended and unintended consequences are inevitable given the Central Economic Problem of Scarcity. What A Level Economics trains you to do is to think critically such that you are able to weigh the pros and cons of each decision, thereafter presenting a coherent, well-reasoned perspective in your exam answers. In today’s article, Zenith has covered the following concepts:
Scarcity in relation to unlimited wants and limited resources
Opportunity Costs in making Choices and the Law of Increasing Opportunity Cost
The Production Possibility Curve
The two types of Economic Growth: Actual Growth and Potential Growth
Find out more about how to tackle Case Studies Questions (applicable for both H1 and H2 students) and Essay Questions (only for H2 students) with Zenith! On that note, Zenith hopes that this article has been useful for helping you understand one of the most important themes in A Level Economics! Find out more about our JC Economics tuition programme here or contact us for a free trial lesson today! We promise you that the Zenith experience will be a worthwhile one!