Session 1 – Scarcity, choice and opportunity cost.
FUNDAMENTAL ECONOMIC PROBLEM.
 Scarcity is the basic economic problem which refers to the availability of limited
resources to satisfy expanding unlimited wants of people.
 Every economic agent , be it ……………………………………………………………. have to tackle the
problem thus it is a universal problem.
 This therefore makes them to make choices which gives rise to three basic economic
questions every economy should answer.
 The 3 questions include
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WHAT TO PRODUCE?
 Since everything cannot be produced, it has to be decided to which production these
resources would be allocated to.
Ex :
………………………………………………………………………………………………………………………
……………….………………………………………………………………………………..……………………
……………………………………..
HOW TO PRODUCE ?
 Since resources are scarce, t has to be decided as to how to achieve best outcome. This
question is mainly about how the economy would allocate the labour and capital
resources in the production process. Are they going to be more capital or labour
intensive?
Ex :
……………………………………………………………………………………………………………………………………….
………………………………………………………………………………………………………………………………………..
WHOM TO PRODUCE ?
*Finally that the goods are produced it has to now be decided as to who will receive these, and
on what basis.
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CHOICE AND OPPORTUNITY COST
 As explained before, the presence of scarcity would make choices inevitable. Thus with
choice comes opportunity cost.
 Opportunity cost is………………………………………………………………………....................................
………………………………………………………………………………………………………….
Example, ………………………………………………………………………………………………..
CALCULATING OPPORTUNITY COST
Calculate OC for the following,
1. Farmer can crop two harvests which includes 30kg wheat or 20kg carrot. Calculate OC
if he chooses to crop carrots.
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2. A person can make 100 hats or 80 shirts a day. Calculate OC if he decides to
 Produce shirts
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………………………………………………………………………………………………………………………………………….
 Produce hats
……………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………
EXAM QUESTIONS
1. Explain the three questions that all economies are confronted with and consider whether
all economies answer the questions in the same way. (8)
2. Explain what is meant by the basic economic problem and consider whether some
economic agents eliminated from the same is true. (8)
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