Basic Economic Concepts and the Economic Problem
The basic economic concepts domain tests scarcity, choice, opportunity cost, factors of production and the production possibility curve (PPC). GCE questions often ask you to apply these ideas to a Cameroonian farm, household or government decision, so define terms precisely and show the sacrifice involved in each choice.
Scarcity, choice and opportunity cost
- Wants are unlimited but resources are limited, so every economy must choose what, how and for whom to produce.
- Scarcity is not the same as a shortage: scarcity is permanent and relative; a shortage is a temporary market imbalance.
- Opportunity cost is the value of the next best alternative forgone. It is not the total money paid, and sunk costs are irrelevant.
- Economic goods are scarce and command a price; free goods such as sunshine are not scarce at the margin.
Factors of production and rewards
Land earns rent, labour earns wages, capital earns interest and entrepreneurship earns profit. Capital means produced means of production such as machines and tools; money is not capital in economics. Entrepreneurship organises the other factors and bears risk.
The PPC
A PPC shows the maximum combinations of two goods an economy can produce with fixed resources and technology. A point on the curve is productively efficient; inside means unemployment or inefficiency; outside is unattainable. The curve is bowed outward because resources are not equally suited to both goods, so opportunity cost rises. Growth shifts the PPC outward; a change in technology for one good can rotate it.
Worked example
A cooperative has 10 hectares. Cocoa gives net income of 900,000 CFA per hectare; plantain gives 600,000 CFA per hectare. If it plants 6 hectares of cocoa and 4 of plantain, income is (6 × 900,000) + (4 × 600,000) = 5,400,000 + 2,400,000 = 7,800,000 CFA. Moving one hectare from plantain to cocoa adds 300,000 CFA of income but forgoes 600,000 CFA of plantain income, so the opportunity cost of that hectare of cocoa is 600,000 CFA. If cocoa prices rise, the cocoa intercept of the PPC shifts outward and the cooperative faces a new trade-off.
Traps that cost marks
Do not call any shortage 'scarcity'; do not count all rejected alternatives as opportunity cost; do not treat money as capital; and do not place an efficient point inside the PPC. Explain the direction of a PPC shift, not just 'the curve moves'.