IGCSE/A‑Level Economics – The Basic Economic Problem: “What to Produce?”
1. Checklist – Have we covered everything?
- ✅ Definition of scarcity and the basic economic problem (including unlimited wants)
- ✅ Economic goods vs. free goods
- ✅ The four factors of production and their rewards (land, labour, capital, enterprise)
- ✅ The three basic economic questions
- ✅ Opportunity cost – definition, formula (with direction), link to the PPC slope, and numeric example
- ✅ Production Possibility Curve (PPC) – drawing, interpretation, points (efficient, inefficient, unattainable), movements and shifts, and why the curve bows
- ✅ Factors that influence the “what to produce” decision
- ✅ Real‑world examples
- ✅ Key points for revision
- ✅ Exam‑style question and suggested answer structure
2. The Basic Economic Problem
2.1 Scarcity and Unlimited Wants
Scarcity means that the resources available to a society (land, labour, capital, enterprise) are limited, whereas human wants are virtually unlimited. Because of this tension societies must decide how to allocate resources.
2.2 Economic Goods vs. Free Goods
- Economic goods: scarce, have a price (e.g., a loaf of bread, a car).
- Free goods: abundant enough that no price is needed (e.g., air, sunlight in most countries).
2.3 Factors of Production and Their Rewards
| Factor | What it supplies | Reward to the owner |
|---|
| Land (natural resources) | Raw materials, space | Rent |
| Labour | Human effort and skill | Wages |
| Capital | Machinery, buildings, tools | Interest |
| Enterprise (entrepreneurship) | Organisation, risk‑taking, innovation | Profit |
2.4 The Three Basic Economic Questions
- What to produce? – Which goods and services should be created?
- How to produce? – Which techniques and inputs will be used?
- For whom to produce? – Who will receive the output?
3. “What to Produce?” – The Core Decision
3.1 Why it is central
Because resources are scarce, societies must decide which combination of goods and services will give the greatest overall benefit. The decision is shaped by:
- Consumer preferences and demand
- Resource endowments (e.g., mineral wealth, skilled labour)
- Opportunity cost – the value of the next‑best alternative that is forgone
- Technology, government policy and international trade
3.2 Opportunity Cost
Definition: The loss of the next‑best alternative when a choice is made.
Formula (using a PPC):
\[
\text{Opportunity cost of X in terms of Y} = \frac{\Delta Y}{\Delta X}
\]
where ΔY is the change in the amount of good Y that must be given up to obtain an additional unit of good X (i.e., “how many units of Y per one unit of X”).
Link to the PPC: The slope of the PPC at any point equals the opportunity cost of the good on the vertical axis in terms of the good on the horizontal axis.
Numeric example: A country can produce either 100 cars or 500 tons of wheat. The opportunity cost of 1 car is:
\[
\frac{500\ \text{tons of wheat}}{100\ \text{cars}} = 5\ \text{tons of wheat per car}
\]
Thus, producing one more car means giving up 5 tons of wheat.
3.3 Production Possibility Curve (PPC)
How to draw a basic PPC
- Label the two axes with the two goods being compared (e.g., Cars on the vertical axis, Wheat on the horizontal axis).
- Mark the maximum possible output of each good when all resources are devoted to it (points C and D).
- Connect these points with a bowed‑out curve to show increasing opportunity costs.
- Label three typical points:
- A – on the curve (efficient – all resources fully and efficiently employed)
- B – inside the curve (inefficient – some resources idle or mis‑allocated)
- E – outside the curve (unattainable with current resources and technology)
Interpreting the PPC
- On the curve: resources are fully and efficiently employed.
- Inside the curve: some resources are idle or being used inefficiently.
- Outside the curve: production level cannot be reached with existing resources/technology.
- Movement along the curve: shows the trade‑off (opportunity cost) between the two goods; the slope at any point equals that opportunity cost.
Why the PPC bows outward
The curve is bowed because resources are not equally suitable for producing every good. As production of one good expands, increasingly less‑suitable resources must be used, leading to a rising marginal opportunity cost (diminishing returns).
What causes the PPC to shift?
| Shift direction | Cause(s) | Result |
|---|
| Outward (right/up) | More resources, better‑quality resources, technological improvement, increase in labour productivity | Higher maximum output of both goods – economic growth |
| Inward (left/down) | Natural disaster, war, loss of skilled labour, deterioration of technology | Lower maximum output – contraction |
3.4 Factors that Influence the “What to Produce” Decision
| Factor | How it influences the choice |
|---|
| Consumer preferences | Higher demand raises the price signal, encouraging firms to allocate more resources to that product. |
| Resource endowments | Abundant natural resources make related goods cheaper to produce (e.g., oil‑rich nations specialise in petroleum products). |
| Technology | Advances raise output for a given amount of input, shifting the PPC outward for the affected good. |
| Government policy | Subsidies, taxes, quotas or public procurement can encourage or discourage production of particular goods. |
| International trade & comparative advantage | A country will specialise in goods it can produce at a lower opportunity cost and import those with a higher opportunity cost. |
3.5 Real‑World Examples
- Resource‑rich developing country – Brazil allocates a large share of land and labour to agriculture because the opportunity cost of not producing food is high.
- Health crisis response – During COVID‑19 many governments prioritised ventilators and vaccines, reducing output of non‑essential consumer goods.
- Market‑driven shift – A sudden rise in the price of smartphones signals firms to move resources from DVD players to smartphone components.
- Trade‑induced specialisation – The United Kingdom, with a comparative advantage in financial services, allocates more resources to banking rather than textile manufacturing.
4. Key Points to Remember
- Scarcity (limited resources) + unlimited wants creates the basic economic problem.
- Economic goods are scarce and priced; free goods are abundant and not priced.
- The four factors of production (land, labour, capital, enterprise) generate rent, wages, interest and profit.
- Opportunity cost = value of the next‑best alternative; it is also the slope of the PPC.
- The PPC visualises trade‑offs, efficiency (points on the curve), inefficiency (points inside) and unattainable output (points outside). Its bowed shape reflects increasing opportunity costs.
- Shifts in the PPC occur because of changes in resource quantity/quality or technology.
- Consumer demand, resource endowments, technology, government policy and comparative advantage all shape the “what to produce” decision.
- Understanding “what to produce” provides the foundation for the next two questions – “how to produce?” and “for whom to produce?”.
5. Exam Practice Question
Question (8‑10 marks): 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 – the quantity and quality of land, labour, capital and enterprise that a country possesses.
- State the definition of opportunity cost and give a brief numerical illustration (e.g., 1 ton of copper vs. 2 hectares of wheat).
- Explain that abundant resources lower the opportunity cost of producing goods that use those resources (e.g., plentiful oil makes petroleum products cheap to produce).
- Link the lower opportunity cost to the likely production choice – the country will specialise in the good with the lowest opportunity cost.
- Conclude by referring to comparative advantage and how specialisation can lead to gains from trade.
6. Looking Ahead – How this fits into the whole syllabus
The “what to produce?” decision is the starting point for the remainder of the Cambridge IGCSE/A‑Level Economics syllabus:
- How to produce? – market structures, factor markets, market failure, and government intervention.
- For whom to produce? – income distribution, inequality, and welfare economics.
- Micro‑economic decision‑makers (households, firms, government) and macro‑economic policies (fiscal, monetary, trade).
- Economic development, globalisation and the role of international trade.
Each subsequent topic will refer back to the basic economic problem, reinforcing the interconnected nature of the syllabus and helping you to build a coherent, exam‑ready understanding.