Model essay (a): scarcity, choice and opportunity cost

What this lesson teaches

• I can explain why scarcity forces people, firms and governments to choose how resources are used.

  Syllabus 9570, 1.1.1(b). Scarcity, choice and resource allocation: Scarcity implies that choices have to be made in the allocation of resources between different uses

• I can explain the trade-off and the opportunity cost (the next best thing given up) in a choice.

  Syllabus 9570, 1.1.1(c). Scarcity, choice and resource allocation: When choices are made, trade-offs and opportunity costs are incurred

• I can use a production possibility curve to show scarcity, opportunity cost, efficiency, unemployment and growth.

  Syllabus 9570, 1.1.1(e). Scarcity, choice and resource allocation: Production Possibility Curve (PPC) can be used to illustrate scarcity, choice, opportunity cost, productive efficiency, full employment, unemployment or under-utilisation of economic resources and changes in the productive capacity of an economy

Make a guess

An essay asks you to use a PPC to explain how scarcity forces choices. Which opening earns the most credit?

1. Draw the PPC first and explain it at the end.
2. Start with Singapore's ageing population statistics.
3. Define scarcity, link it to choice, then draw the PPC.

The answer to part (a)

Introduction

Scarcity means that resources are limited compared with the wants they could satisfy. The factors of production, which are land, labour, capital and entrepreneurship, are all limited. So a country cannot produce everything its people want, and must choose what to produce. Each choice has an opportunity cost: the next-best alternative given up. A production possibility curve (PPC) shows both ideas.

Paragraph 2: scarcity on a PPC

Figure 1 shows the most healthcare and other goods and services Singapore can produce when it uses all its resources efficiently with today's technology. Singapore has very little land and a limited number of workers. So a point such as D, beyond the curve, cannot be reached, however much people want it: this is scarcity. Points on the curve, such as A and B, use all resources efficiently. A point inside the curve, such as C, means some workers or buildings are idle, so more of both could be produced.

Paragraph 3: choice and opportunity cost

Because Singapore is on its PPC, it can produce more healthcare only by producing less of something else. As the population ages, Singapore may move from A to B, training more nurses and using land for hospitals and care homes. To do so, workers and land must move away from other uses, such as retail, construction or manufacturing. The other goods and services given up are the opportunity cost of the extra healthcare. Choosing is unavoidable: staying at A means giving up the extra care older people need.

Paragraph 4: why opportunity cost rises

The PPC bows outwards because resources are not equally suited to every use. The first workers moved into healthcare are those best suited to it, such as people with medical training working in other jobs. So little other output is lost. As Singapore moves further towards B, it must use workers and land less suited to healthcare. So each extra unit of healthcare means giving up more other goods. The opportunity cost of healthcare rises as more of it is produced.

Paragraph 5: choices by others

The same logic applies to every decision maker. The government's budget is limited, so money spent on hospitals cannot also be spent on schools or defence. A household that spends more on caring for an elderly parent has less to spend on other things.

Conclusion

Scarcity means Singapore cannot have everything it wants, so it must choose between kinds of output, as shown by its PPC. Each choice has an opportunity cost, the next-best alternative given up, and that cost rises as more resources are moved into one use.

Margin notes: how each paragraph scores

Introduction

Defines scarcity, the factors of production and opportunity cost precisely.

Paragraph 2

Uses every type of point on Figure 1 and links each to scarcity or efficiency, with Singapore's land and labour as context.

Paragraph 3

The second requirement: a movement along the PPC, with a real reason (ageing) and a clear statement of what is given up.

Paragraph 4

Explains the bowed shape through unequal suitability of resources. This extra depth is typical of L3 answers on this question.

Paragraph 5

Extends the idea to the government and households in two sentences, showing it is general.

Overall: L3, 9 or 10 marks

Both ideas explained with a correct, well-used PPC and context. Defining terms without using the PPC would cap the answer at L2.

Worked example: A 3-minute plan

Two linked ideas, both on one PPC.

1. Intro: scarcity, the factors of production, choice, opportunity cost.
2. PPC: on the curve efficient; D unattainable (scarcity); C idle resources.
3. Choice: A to B, more healthcare for an ageing population; other goods given up are the opportunity cost.
4. Rising opportunity cost: resources not equally suited, so the PPC bows out.
5. Close: scarcity means every choice has a cost.

Watch out for this

The opportunity cost of building a hospital is everything else the money could have bought.

Opportunity cost is only the next-best alternative given up, not all the alternatives added together. If the next-best use was a school, the school is the opportunity cost.

Check your understanding

Why does the PPC in Figure 1 bow outwards?

1. Technology improves over time, so the curve moves outwards as it goes.
2. Singapore has more healthcare workers than other workers, so it bends outwards.
3. Resources suit the two outputs differently, so each extra unit costs more.