Basic Economic Ideas and Resource Allocation
Domain 1 tests the scarcity–choice–opportunity cost chain and whether you can apply it to production decisions, economic systems and the positive/normative distinction.
Core rules
- Resources are scarce relative to wants, so every choice carries an opportunity cost: the value of the next best alternative forgone.
- The four factors of production and their rewards: land–rent, labour–wages, capital–interest, enterprise–profit.
- A production possibility frontier (PPF) shows the maximum combinations of two goods producible with given resources and technology. Its slope is marginal opportunity cost; a concave (bowed-out) PPF means increasing opportunity cost because factors are imperfectly transferable.
- Inside the PPF = unemployed or inefficiently used resources; on the frontier = productive efficiency; outside = unattainable until resources or technology improve.
- Specialisation and division of labour raise output per worker (learning by doing, time saved) but create interdependence and coordination costs. Money overcomes the double coincidence of wants that restricts barter.
- Market, command and mixed economies differ in who answers what, how and for whom to produce.
Worked example
An economy can produce 80 tonnes of rice and no textiles, or 60 tonnes of rice and 20 units of textiles. The opportunity cost of the first 20 textiles is 20 tonnes of rice, i.e. 1 tonne per unit. Because the PPF is concave, the next 20 units may cost 30 tonnes of rice - marginal opportunity cost rises.
Traps
Shifting the whole PPF when the question only moves along it; labelling "the government should subsidise childcare" as positive (it is normative); calling money "capital"; assuming opportunity cost is always a money payment.