1.1 Scarcity, Choice and Opportunity Cost (稀缺、选择与机会成本)
Syllabus requirements (考纲要求)
1.1.1 fundamental economic problem of scarcity
1.1.2 need to make choices at all levels (individuals, firms, governments)
1.1.3 nature and definition of opportunity cost, arising from choices
1.1.4 basic questions of resource allocation
• what to produce
• how to produce
• for whom to produce
1.1.1 The Fundamental Economic Problem of Scarcity
Scarcity (稀缺性): when available resources are insufficient to satisfy all wants and needs.
The fundamental economic problem (基本经济问题): unlimited wants exceed limited/scarce resources, requiring choices to be made about resource allocation.
Scarcity arises because human wants are unlimited while resources are finite. It is the central problem faced by all societies, regardless of wealth or level of development.
Key distinctions:
- Needs (需要) — things necessary for survival, such as food, water, shelter
- Wants (欲望) — desires beyond basic needs, such as luxury cars, holidays, the latest technology
- Economic agents (经济主体) — individuals (consumers), firms, and governments — all face scarcity
Scarcity is permanent and universal — it applies to all societies at all times, not just poor countries. A billionaire still faces scarcity: resources are finite even when purchasing power is high, and there are only 24 hours in a day.
Scarcity ≠ shortage (稀缺 ≠ 短缺). Scarcity is a permanent, universal condition (wants always exceed resources). A shortage is a temporary, market-specific situation where quantity demanded exceeds quantity supplied at a given price — it can be resolved through price adjustment or increased supply.
1.1.2 The Need to Make Choices
Because of scarcity, all economic agents must make choices about how to allocate scarce resources among competing uses.
Choice (选择): the need to decide between different alternatives due to scarcity of resources.
Logic chain:
Unlimited wants+ Limited resources= Scarcity→Choice→Opportunity cost
Every choice involves a trade-off (权衡取舍) — gaining something means giving up something else.
1.1.3 Nature and Definition of Opportunity Cost
Opportunity cost (机会成本): the next best alternative forgone when making a choice; the value of the benefit that could have been gained from the next best alternative.
This is one of the most frequently tested definitions across all CIE 9708 papers.
Key features:
- It is the next best alternative — not all alternatives. If you choose A over B and C, the opportunity cost is whichever of B or C was the next most valued option, not both.
- It is not necessarily measured in money. Opportunity cost includes time, enjoyment, and any other benefit sacrificed.
- It applies to all economic decisions — by individuals, firms, and governments.
Examples at each level:
- Defining opportunity cost as "what you give up" without specifying "next best" — the key word is next best, not all alternatives
- Listing multiple forgone alternatives as the opportunity cost — only the single next best alternative counts
- Measuring opportunity cost only in monetary terms — it includes time, pleasure, and any other benefit
- Confusing a trade-off with opportunity cost — a trade-off is the act of giving something up; opportunity cost is the value of the specific next best alternative forgone
The production possibility curve (PPC, see 1.5) provides a graphical illustration: moving along the curve, producing more of one good requires producing less of the other — the reduction is the opportunity cost.
Exam tip — how to answer "Explain the opportunity cost of..." [4 marks]:
Step 1: Define opportunity cost (next best alternative forgone)
Step 2: Identify what is being chosen (the action or decision)
Step 3: Identify the next best alternative (what was given up)
Step 4: Explain the benefit sacrificed (what value/utility was lost by not choosing the alternative)
1.1.4 Basic Questions of Resource Allocation
Because of scarcity, every society must answer three fundamental questions:
1. What to produce? (生产什么？)
Which goods and services should be produced, and in what quantities? Should the economy prioritise consumer goods or capital goods? More healthcare or more military equipment?
2. How to produce? (如何生产？)
What combination of factors of production should be used? Should production be labour-intensive (劳动密集型) or capital-intensive (资本密集型)? This relates to productive efficiency — producing output at the lowest possible cost.
"How to produce" is not purely an economic question — moral and social considerations may also apply (e.g. using cheap child labour may be cost-efficient but ethically unacceptable).
3. For whom to produce? (为谁生产？)
How should the output be distributed? Based on ability to pay (market mechanism), need (government allocation), or some other criteria? This relates to equity (公平) and the distribution of income and wealth.
Different economic systems answer these questions differently:
(How different economic systems answer these questions is analysed in detail in 1.4.)
The margin and decision-making
How do rational agents make the choices described above? By thinking at the margin.
The margin (边际): economists assume that rational agents make decisions by comparing the marginal (additional) benefit and marginal cost of each extra unit. This "thinking at the margin" is a Key concept that runs through the entire syllabus — from consumer choices (marginal utility, 7.1) to firm decisions (marginal cost/revenue, 7.5) to policy evaluation (marginal social benefit vs marginal social cost, 7.3).
Example 1 — study time: a student with 3 hours of study time should allocate each additional hour to the subject where the extra marks gained are highest. If the 3rd hour of Economics study yields fewer marks than 1 hour of Maths revision, the rational choice is to switch — because the marginal benefit of Economics has fallen below that of Maths.
Example 2 — everyday life: should I eat one more slice of pizza? Compare the marginal benefit (enjoyment of an extra slice) with the marginal cost (feeling too full, extra calories). If MB > MC, eat it. If MC > MB, stop. This is marginal thinking applied to a simple decision.
Cross-references
Exam-style thinking questions
- Distinguish between scarcity and shortage. [2]
- Explain, with examples, why the concept of opportunity cost is relevant to individuals, firms, and governments. [8]
- A government decides to spend an additional $2 billion on defence. Explain the opportunity cost of this decision. [4]
- A student gives up a part-time job paying $100/week to attend university. The next best alternative to university was travelling, which would have cost $200. What is the opportunity cost of attending university? [1]
A. $100
B. $200
C. $300
D. The part-time job and its earnings
Last updated: 2026-06-24