Scarcity, choice and opportunity cost

The basic economic problem

Human wants are unlimited, but the resources (factors of production) to satisfy them are finite. This is scarcity. Because of scarcity, every society must answer three questions: what to produce, how to produce it, and for whom.

The four factors of production are land (natural resources), labour (human effort), capital (man-made aids to production such as machines) and enterprise (organising the other factors and taking risks).

Renewable and non-renewable resources

• Renewable resources can be replenished naturally over time if used sustainably: fish stocks, forests, solar and wind energy, fresh water.
• Non-renewable resources are finite and are used up: oil, natural gas, coal, metal ores.

A renewable resource can still be depleted if it is used faster than it regenerates, for example overfishing or groundwater taken faster than it refills. This links to market failure later in the unit.

Opportunity cost

Because resources are scarce, choosing one thing means giving up something else. Opportunity cost is the value of the next best alternative forgone. Only the single best alternative counts, not every alternative.

Examples: a government that spends $2bn on a new airport cannot spend it on hospitals; a student who works a Saturday job forgoes study or leisure time; a farmer who grows wheat on a field forgoes the maize it could have produced.

Free goods and economic goods

• An economic good is scarce: producing or consuming it uses resources that have alternative uses, so it has an opportunity cost. Most goods and services are economic goods.
• A free good is not scarce: there is enough to satisfy everyone's wants at zero price, so using it has no opportunity cost. Examples: air to breathe, seawater, sunlight.

A good can change category. A lake that once had plenty of water for everyone may become an economic good if it shrinks and users compete for its water.

Worked example

A town council has $1m. It ranks its options: (1) a new library, (2) road repairs, (3) a sports centre. It chooses the library. What is the opportunity cost?

1. Opportunity cost is the next best alternative forgone, not all alternatives.
2. The next best option was road repairs.

Answer: The road repairs (not the road repairs plus the sports centre).

Check yourself

1. A student chooses to spend an evening revising rather than working a paid shift (her second choice) or seeing friends (her third choice). The opportunity cost of revising is
   • the pay from the shift
   • the pay from the shift and the evening with friends
   • the evening with friends
   • nothing, because revising is free
   Show answer

   the pay from the shift. Only the next best alternative counts.

2. Which is the best example of a free good?
   • Bottled water
   • Tap water supplied to homes
   • Air in an open field
   • A public park maintained by the council
   Show answer

   Air in an open field. There is enough air for everyone at zero price, so it has no opportunity cost.

3. Which is a non-renewable resource?
   • Natural gas
   • Solar energy
   • Timber from a managed forest
   • Wind
   Show answer

   Natural gas. Natural gas is finite and cannot be replaced on a human time scale.

4. Scarcity exists because
   • prices are too high
   • governments restrict production
   • some goods are free
   • wants are unlimited but resources are finite
   Show answer

   wants are unlimited but resources are finite. This is the basic economic problem in every economy, rich or poor.

5. Explain the difference between a free good and an economic good.
   Show answer

   An economic good is scarce, so producing it uses resources with alternative uses and it has an opportunity cost. A free good is not scarce: there is enough for everyone at zero price, so it has no opportunity cost.. Define each using scarcity and opportunity cost.

6. Explain how a lake's water could change from a free good to an economic good.
   Show answer

   If the lake shrinks or demand for its water grows, there is no longer enough for everyone, so the water becomes scarce. Using it then means others go without, so it has an opportunity cost and becomes an economic good.. Link the change in supply or demand to scarcity and opportunity cost.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.