Definitions Needed:

1. Scarcity: Is the problem arising from limited resources and unlimited

wants.
2. Opportunity Cost: Is the cost of making a choice based on the next
best forgone alternative.
3. The Law of Increasing Opportunity cost: States that as more of an item
is produced, more of another item has to be sacrificed in production.
4. The Production possibility curve: Shows all the different maximum
attainable combinations of goods or services that can be produced in
an economy, when all the available resources are used fully and
efficiently, at a given state of technology.

Scarcity
Factors
1. Unlimited wants
a. The desire for higher levels of consumption of goods and
services.
2. Limited resources
a. There is a finite amount of factors of production.
i. Land Natural resources e.g. oil, water, mineral deposits
ii. Labour Human resource quality and quantity of labour
iii. Capital physical assets/ goods e.g. tools, machinery
iv. Entrepreneurship ability of human resource to use land,
labour and capital so as to maximise output e.g. business
organisations.

Choice
Factors
1. What and how much to produce?
a. The decision on the type and quantity of goods and services to
produce addresses the problem of resource allocation e.g.
government to decide on the budget for healthcare and military.
2. How to produce
a. The decision on the method of production depends on the
objectives of producers and resources available when choosing
the most efficient method to utilise scarce resources e.g. labour
intensive or capital-intensive.
3. For whom to produce

a. The decision on the distribution of goods and services in order to

avoid wastages, is to produce for those who want the goods and
services the most.

Types of economy
1. Command
a. All decisions are made by the government.
2. Free Market
a. Consumers and producers are motivated by self-interests and
profit maximisation equilibrium price and output are
determined by price mechanism
3. Mixed
a. A balance of free market forces and government intervention
(e.g. Singapore)
Productive Possibility Curve
1. Assumption
a. Economy only produces two goods or services.
b. Production is observed over a specific time period.
c. Quantity and quality of resources remain the same throughout
the production period observed.
d. Level of technology remains the same throughout the production
period observed.
e. Resources are fully employed and utilised.