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Basic Economic Ideas

Where economics begins: scarcity and the basic economic problem, choice and opportunity cost, the factors of production, the main economic systems, and what a production possibility frontier shows.

⏱️ 17 min 🎯 14 activities
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What you'll cover

The basic economic problem

Economics starts from one hard fact: people have unlimited wants, but the resources to meet them are limited. This is scarcity, the basic economic problem. Because resources are scarce, every choice means giving something up, and the next best alternative you give up is the opportunity cost. The resources used to make things are the factors of production: land (natural resources), labour (workers and their effort), capital (machinery and tools) and enterprise (the person who takes the risk and organises the rest). Different countries answer the problem with different economic systems: a market economy leaves it to firms and buyers, a planned economy lets the government decide, and a mixed economy uses both. A production possibility frontier shows the most a country can make and the opportunity cost of choosing. This module covers these basic ideas.

Economics words

Learn these before you match anything, and keep scarcity and opportunity cost clearly in mind.

Market against planned economy

Countries allocate resources in different ways, and the two extremes sit at opposite ends.

How scarcity forces a choice

Start every economic question from scarcity. Because there is never enough to meet all wants, someone must choose what to make and who gets it. The moment a choice is made, something else is given up, and naming that next best sacrifice is the opportunity cost. Ask what resources are available, what they could be used for instead, and what is lost by the choice taken. Whether it is a person, a firm or a whole country deciding, the same logic of scarcity, choice and opportunity cost applies.

Match the factor to an example

  • land
  • labour
  • capital
  • enterprise
  • natural resources such as fields and minerals
  • the workers and their effort
  • the machinery and tools used to produce
  • the person who takes the risk and organises the rest

What is the opportunity cost?

A student has one free evening and chooses to revise rather than see friends or watch a film. Seeing friends was the next best option. What is the opportunity cost of revising?

  • Seeing friends, the next best option given up.
  • Both seeing friends and watching the film together.
  • Revising, the choice that was made.
  • Nothing, since revising is free.

The basic economic problem

Select the TWO statements that describe the basic economic problem.

  • People have unlimited wants
  • Resources are limited and scarce
  • Resources are unlimited
  • No one ever has to make a choice

Land for barley

A farm has 10 hectares of land and uses 6 hectares to grow wheat. Subtract to find how many hectares are left to grow barley.

Order making an economic choice

Put the reasoning of an economic choice in order, earliest first.

  • Resources are scarce
  • Wants are greater than what can be made
  • A choice about what to produce must be made
  • The next best option given up is the opportunity cost

Complete the economics facts

Limited resources set against unlimited wants is the problem of _____. The next best alternative given up when a choice is made is the _____ cost. The workers and their effort are the factor of production called _____. The machinery and tools are the factor called _____.

scarcity opportunity labour capital surplus sunk land enterprise

Match the term to its meaning

  • scarcity
  • opportunity cost
  • the production possibility frontier
  • a mixed economy
  • limited resources against unlimited wants
  • the next best choice given up
  • the maximum combinations a country can produce
  • one where both the market and the government decide

Spot the true economics facts

Tap the TWO statements that are true about basic economic ideas.

  • Scarcity means limited resources but unlimited wants
  • Opportunity cost is the next best option given up
  • Resources are unlimited, so no choices are needed
  • Machinery and tools are called land

Make the choice

Read each case and choose the best response, with a reason.

  • A government has money for either a new hospital or a new road, but not both. What does choosing the hospital involve?
  • In a country, private firms decide what to make, guided by prices and demand, with little government control. Which system is this?
  • A student says there is no economic problem because a rich country can afford anything. How should this be corrected?

Explain the basic economic problem

A new economics student asks why choices have to be made at all. Explain the basic economic ideas that answer this.

  • Explain what scarcity and the basic economic problem are
  • Explain what opportunity cost means, with an example
  • Name the four factors of production and what each is
  • Explain the difference between a market and a planned economy
  • Finish by explaining what a production possibility frontier shows