Finite Resources & Infinite Wants (Cambridge (CIE) IGCSE Economics): Revision Note

The basic economic problem

• The basic economic problem is that resources are scarce

  • In economics, these resources are called the factors of production

• There are finite resources available in relation to the infinite wants and needs that humans have

  • Needs are essential to human life, e.g. shelter, food, clothing

  • Wants are non-essential desires, e.g. better housing, a yacht etc

Scarcity

• The mismatch between finite resources and infinite wants and needs creates scarcity, meaning that not all wants and needs can be satisfied

• Economics is the study of scarcity and its implications for resource allocation in society

• Due to the problem of scarcity, choices have to be made by producers, consumers, workers and governments about the best (most efficient) use of these resources

Scarcity for all economic agents

• Economic agents include all the decision-makers in the economy, including:

  • Consumers, producers, workers and governments

1. Consumers and the basic economic problem

• In a free market, scarcity has a direct influence on prices

  • The scarcer a resource or product, the higher the price consumers will pay

  • The more abundant a resource or product, the lower the price consumers will pay

2. Producers and the basic economic problem

• Producers selling products made from scarce resources will find their costs of production are higher than if they were selling products made from more abundant resources

3. Workers and the basic economic problem

• Workers may want a more comfortable and safer working environment but their employers may not have the resources to create it

4. Governments and the basic economic problem

• Governments have to decide if they will provide certain goods or services, or if they will allow private firms to provide them instead

• Their decision influences the allocation of resources in society

  • E.g. If they choose to provide national healthcare, fewer doctors will be available to work in private healthcare

Economic goods and free goods

• Economic goods are scarce in relation to the demand for them

  • This makes them valuable

  • Due to their value, producers will attempt to supply them in order to make a profit

  • Anything that has a price tag on it is an economic good, e.g. oil, corn, gold, trainers, watches and bicycles

• Free goods are abundant in supply

  • Due to this abundance, it is not possible to make a profit from supplying free goods

  • Drinking water has been a free good for thousands of years, but as the population increases and water sources become more polluted, it has become an economic good

    • E.g., sunlight, the air we breathe, and seawater