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The fundamental economic problem is:

‘scarce resources in relation to unlimited wants'.

Scarcity: The excess of human wants over what can actually be produced to fulfil these wants

Resources: inputs available for the production of goods and services.

Wants: needs that are not always realised.


Choice underpins the concept that resources are scarce so choices have to be made by consumers, firms, and governments.


Choice involves sacrifice. The more food you choose to buy, the less money you will have to spend on other goods.

Opportunity cost

In other words, the production or consumption of one thing involves the sacrifice of alternatives. This sacrifice of alternatives in the production (or consumption) of a good is known as its opportunity cost.

Opportunity cost is the cost expressed in terms of the best alternative that is forgone.

Examples of economic problems


Households have limited income and must make decisions about how to spend it. For example, a household with a yearly income of £20,000 may need to spend £10,000 on rent, council tax, and utility costs. This leaves £10,000 to spend on other food, clothing, transportation, and other purchases.


A producer must maintain profitability (revenue higher than costs). As a result, it will need to produce high-demand goods while also adapting to changing consumer expectations and purchasing behaviours, such as shifting to online sales as high-street sales fall. Producers will need to constantly ask themselves what is the best approach to produce goods. Purchasing new machines, for example, can boost production and allow businesses to create items at a lesser cost. This is critical in rapidly changing industries where new technology is frequently lowering production costs. Firms can become unprofitable if they do not alter their production methods. Firms may also need to make long-term investment decisions in order to invest in new products and manufacturing methods.


The government has limited resources, and its spending ability is restricted by the amount of taxation that can be collected. The government must first decide how to collect taxes, and then decide on whom to spend the money on. For example, the government may wish to cut benefits to those on low income to increase incentives to work. Benefit cuts, on the other hand, will exacerbate inequality and relative poverty.

Opportunity cost and the economic problem
The concept of opportunity cost can be used to demonstrate an economic problem.

Opportunity cost is the next best alternative foregone. A consumer with a limited income of £20,000 per year is constantly faced with choices; if they spend £3,000 on a new automobile, that is £3,000 they cannot spend on food and drink.

If a student spends three years in college, the opportunity cost is the earnings potential from a full-time job.

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The basic economic problem

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