Basic Economic Concepts and the Economic Problem
This domain opens the paper and supplies the vocabulary every later question assumes. The examiner does not want dictionary definitions recalled in isolation; expect short applied stems - a farm choosing between crops, a government choosing between a hospital and a motorway - where you must identify scarcity, demonstrate opportunity cost numerically, and distinguish positive from normative reasoning.
Scarcity, choice and opportunity cost
- Scarcity is a permanent condition: resources are limited relative to unlimited wants. A shortage is a temporary market imbalance caused by price being held below equilibrium. Do not use them interchangeably.
- Opportunity cost is the value of the next best alternative forgone, measured in the good sacrificed, not in money paid.
- Free goods exist only where the quantity available exceeds wants at zero price; even beach access in Cyprus carries an opportunity cost in land use or maintenance.
- Every agent faces the cost: the state's opportunity cost of a new highway is the school or hospital not built.
The production possibility frontier (PPF)
- A point on the curve is productively efficient; inside the curve means unemployed or inefficiently used resources; outside is unattainable with current resources and technology.
- A straight-line PPF indicates constant opportunity cost (resources are perfectly substitutable). A concave PPF indicates increasing opportunity cost as resources are switched into uses for which they are less suited.
- The PPF shifts outward with more or better resources or improved technology. A biased shift reflects improvement specific to one good.
Methodology
- Positive statements are testable against evidence; normative statements rest on value judgements. A sentence containing a figure can still be normative if it includes 'should'.
- Microeconomics examines individual markets and agents; macroeconomics examines aggregates such as output, the price level, unemployment and the balance of payments.
Worked example
A Cypriot farm can produce either sheep milk for halloumi or grapes for Commandaria. With a linear frontier it can produce 400 litres of milk or 2 tonnes of grapes per season. Moving from 300 to 400 litres costs 2 tonnes of grapes, so the opportunity cost of the last 100 litres is 2 tonnes, i.e. 20 kg of grapes per litre. If milk sells at €1.20 per litre and grapes at €300 per tonne, the extra 100 litres earns €120 but sacrifices €600 of grapes. The rational decision is to produce grapes, not milk, at the margin.
Traps that cost marks
- Defining opportunity cost as the money paid rather than the alternative forgone.
- Confusing a movement along the PPF (reallocation of given resources) with an outward shift (growth).
- Describing a point inside the PPF as unattainable; it is attainable but inefficient.
- Labelling a normative claim positive because it quotes a statistic.