Cambridge IGCSE Economics 0455 – The Basic Economic Problem: Consumers
The Basic Economic Problem – The Nature of the Problem for Consumers
1. What is the basic economic problem?
The basic economic problem arises because resources are scarce while human wants are unlimited. This forces individuals, firms and governments to make choices about how to allocate resources efficiently.
2. How does the problem affect consumers?
Consumers face three inter‑related decisions:
What to buy (choice of goods and services).
How much to buy (quantity decision).
From which source to obtain the goods (choice of supplier or brand).
Every choice involves an opportunity cost – the value of the next best alternative that is foregone.
3. Opportunity cost for consumers
Mathematically, the opportunity cost (OC) of a choice can be expressed as:
\$OC = \frac{\text{Value of next best alternative}}{\text{Units of chosen good}}\$
For example, if a consumer spends \$£50 on a pair of shoes instead of a concert ticket worth \$£50, the opportunity cost of the shoes is the concert experience.
4. Real‑world examples
Budget constraint: A student has £200 per month for entertainment. Choosing to spend £120 on a gym membership leaves only £80 for movies, dining out, or savings.
Time scarcity: A working parent has 10 hours of free time each week. Using 4 hours to shop online means 6 hours are unavailable for leisure activities or extra work.
Limited product availability: During a shortage of smartphones, a consumer must decide whether to buy the available model at a higher price or wait for a preferred model that may be cheaper later.
Trade‑off between quality and quantity: With a fixed food budget, buying a few high‑quality organic items means fewer total items compared with buying a larger quantity of standard produce.
5. Table – Consumer Choices and Their Opportunity Costs
Choice
What is given up (Opportunity Cost)
Resulting Benefit
Buy a new laptop for £800
£800 that could have been saved or spent on a holiday
Improved productivity and access to new software
Spend 5 hours watching a series
5 hours that could have been used for part‑time work (£75) or studying
Relaxation and entertainment
Purchase organic vegetables (£30/week)
£30 that could have been used for a gym membership
Health benefits from higher‑quality food
6. Diagram – Consumer Choice under Scarcity
Suggested diagram: A simple budget line showing two goods (e.g., clothing and entertainment) with the consumer’s indifference curves illustrating the optimal consumption point where the highest indifference curve is tangent to the budget line.
7. Summary
For consumers, the basic economic problem means that every decision involves a trade‑off. Understanding scarcity, choice and opportunity cost helps consumers make informed decisions that maximise their satisfaction given limited resources.