IGCSE Economics – The Basic Economic Problem: What to Produce
The Basic Economic Problem – Resource Allocation Decisions
Objective
Understand the three basic economic questions that determine how scarce resources are allocated, with particular emphasis on the question “What to produce?”.
The Three Basic Economic Questions
What to produce? – Deciding which goods and services should be created given limited resources.
How to produce? – Choosing the techniques and inputs (labor, capital, technology) that will be used.
For whom to produce? – Determining who will receive the output (distribution).
Why “What to Produce” is Central
Because resources (land, labor, capital, entrepreneurship) are scarce, societies must prioritize certain products over others. The decision reflects:
Opportunity cost – the value of the next best alternative foregone.
Opportunity Cost and the Production Possibility Frontier (PPF)
The PPF illustrates the trade‑offs involved in the “what to produce” decision. Points on the curve represent efficient production combinations; points inside are inefficient, and points outside are unattainable with current resources.
Suggested diagram: A Production Possibility Frontier showing two goods (e.g., Cars and Wheat) with points A (efficient), B (inefficient), and C (unattainable).
Mathematically, the slope of the PPF at any point gives the marginal rate of transformation (MRT), which equals the opportunity cost:
\$\text{MRT}_{\text{Cars for Wheat}} = -\frac{\Delta \text{Cars}}{\Delta \text{Wheat}} = \text{Opportunity Cost of one Car in terms of Wheat}\$
Factors Influencing the “What to Produce” Decision
Factor
Impact on Production Choice
Consumer Preferences
Higher demand for a good shifts resources toward its production.
Resource Endowments
Abundant resources make related goods cheaper to produce.
Technology
Improved technology can increase output of a good without additional resources.
Government Policy
Subsidies or taxes can encourage or discourage production of certain goods.
International Trade
Comparative advantage may lead a country to specialise in goods it can produce relatively efficiently.
Examples of “What to Produce” Decisions
A developing country with abundant arable land may allocate more resources to agriculture rather than heavy industry.
A government facing a health crisis may prioritize production of medical supplies over luxury goods.
In a market economy, firms respond to price signals; a rise in the price of smartphones signals producers to increase output.
Key Points to Remember
Scarcity forces societies to make choices about what to produce.
Opportunity cost is the central concept for evaluating these choices.
The Production Possibility Frontier visualises trade‑offs and efficiency.
External factors (preferences, resources, technology, policy, trade) shape the decision.
Exam Practice Question
Question: Explain how a country’s resource endowment influences its decision on “what to produce”. Use the concept of opportunity cost in your answer.
Suggested answer structure:
Define resource endowment.
Explain opportunity cost with a simple example (e.g., land vs. labour).
Link the example to the country’s likely production choice.