Scarcity and Decision Making Notes

H2 Economics Chapter 1 Notes This document is intended as a summary of the points provided in the NJC 2023 H2 Economics Chapter 1 Seminar Notes. It is to be used as a study guide to provide a structure for studying the Chapter 1 Notes. 1 The Central Economic Problem In our society, there is a fundamental problem. While all of us wish to maximise our satisfaction, which we can achieve by consuming goods and services, there are scarce resources. Hence, some of our needs and wants cannot be satisfied. This is the problem of scarcity, in short. Scarcity is defined as the excess of unlimited wants over limited resources to produce goods and services to satisfy these wants. Wants are all the goods and services that consumers would purchase in order to increase their satisfaction, if they had unlimited income. Resources are inputs which can be used to produce goods and services, which consists of capital, entrepreneurship, land and labour. Land refers to resources supplied by nature. Labour refers to the resource of human effort, both physical and mental, which are directed to the production of goods and services. Capital refers to man-made resources that can be used in the production of other goods and services rather than being consumed for their own sake. Entrepreneurship is a human resource which is separate from labour, referring to managerial ability that involves the organising of factors of production. Entrepreneurs are rewarded in the forms of profits by taking risks related to the production of goods and services. Opportunity cost is the value of the next best alternative forgone when a choice is made. 1

NJC H2 Economics 2024 Chapter 1 Scarcity exists as there is an excess of unlimited wants over limited resources to produce goods and services to satisfy these wants. Since the inputs needed to produce goods and services are limited, it is impossible to produce all the goods and services consumers would buy to increase their satisfaction if they had unlimited income. This is known as the central economic problem of scarcity. Hence, a choice has to be made regarding the production of goods and services and the allocation of resources to production to obtain the highest level of societal welfare from the available resources. A decision must be made for which goods and services to produce and how much of each good and service to produce. A decision must also be