Cambridge IGCSE Economics 0455 – The Basic Economic Problem
The Basic Economic Problem
Nature of the Basic Economic Problem
Every economy faces the fundamental problem of scarcity: resources (land, labour, capital and entrepreneurship) are limited, while human wants are unlimited. Because of this scarcity, societies must make choices about how to allocate resources, which inevitably creates opportunity costs.
Scarcity: There are not enough resources to produce all the goods and services that people desire.
Choice: Decision‑makers must decide which goods and services to produce and which to forgo.
Opportunity Cost: The value of the next best alternative that is given up when a choice is made, expressed as \$OC = \text{Benefit of forgone alternative}\$.
Examples of the Basic Economic Problem in the Context of Governments
Governments at all levels must allocate limited public resources to meet competing societal needs. The following examples illustrate how the basic economic problem manifests in public decision‑making.
Budget Allocation: A national government has a fixed tax revenue of \$R\$ and must decide how much to spend on health, education, defence and infrastructure. Choosing a larger health budget means less money is available for other sectors, creating an opportunity cost.
Public Housing vs. Environmental Protection: A local authority may have a limited land bank. Allocating land for new affordable housing reduces the area available for parks or flood‑defence projects.
Infrastructure Investment: Deciding whether to build a new highway or upgrade a railway line involves weighing the benefits of reduced road congestion against the benefits of increased rail capacity.
Social Welfare Programs: Expanding unemployment benefits requires either raising taxes, borrowing, or cutting spending elsewhere, each of which has its own economic consequences.
Emergency Response: In a natural disaster, a government must allocate emergency funds between immediate relief (food, shelter) and long‑term reconstruction, each with distinct opportunity costs.
Comparative Table of Government Choices
Government Level
Resource Scarcity
Key Choice
Opportunity Cost
National
Limited fiscal revenue
Health spending vs. defence spending
Reduced defence capability or lower health outcomes
Regional
Finite land and labour
Industrial park development vs. agricultural land preservation
Loss of food production or reduced industrial growth
Local
Constrained municipal budget
Public transport upgrades vs. road maintenance
Increased traffic congestion or poorer public transport service
Suggested diagram: A simple production possibility frontier (PPF) showing a government's trade‑off between two public goods (e.g., health services and education). The curve illustrates scarcity, choice and opportunity cost.