The Basic Economic Problem and Economic Systems
Domain 1 tests the foundation of the syllabus: why choices must be made, what they cost, and how different societies organise production. Expect questions on scarcity, opportunity cost, the production possibility curve (PPC) and the main economic systems.
Scarcity, choice and opportunity cost
Wants are unlimited but resources are finite, so every society must answer three questions: what to produce, how to produce it, and for whom. Scarcity is permanent and universal; a shortage is a temporary market condition at a particular price. Because choosing one option means giving up another, the next best alternative forgone is the opportunity cost, measured in goods sacrificed, not in money paid.
Factors of production and the PPC
Land, labour, capital and entrepreneurship earn rent, wages, interest and profit. A PPC shows the maximum combinations of two goods producible when all resources are fully and efficiently used. Points on the curve are efficient, points inside show unemployment or inefficiency, points outside are unattainable with present resources. The curve shifts outward with more or better resources or improved technology.
Economic systems
A market economy allocates through prices; a planned economy through central direction; a mixed economy combines both. Namibia is mixed: private firms dominate mining, retail, tourism and finance, while the state owns NamPower, NamWater and TransNamib and redistributes income through grants and subsidies.
Worked example
A government has N$600 million and must choose between a hospital costing N$600m and a package of a road (N$400m) plus clinics (N$200m). Choosing the hospital makes the road-and-clinics package the opportunity cost. If that package would deliver more health and transport benefit per dollar, the hospital is not the best use of funds even though it is affordable.
Traps that cost marks
- Defining opportunity cost as money spent rather than the next best alternative forgone.
- Confusing a movement along the PPC (reallocation) with an outward shift (growth in capacity).
- Assuming scarcity only affects low-income countries.