“The Central Problem of Economics (CPE) is about scarcity and choice.” Is this statement true? [25 marks]

This paper examines the central problem of economics (CPE). 

One fundamental assumption of economics is that man’s wants are unlimited but the world’s resources are limited. 

In economics, resources refer to the factors of production of land, labour, capital, and entrepreneurship. 

Land refers to natural resources, such as oil, gas, minerals, and water. 

Labour refers to human effort and skill. 

Capital refers to goods that produce other goods, like any machine or equipment that can produce other things. It does not solely refer to financial capital or money or finance. 

Entrepreneurship is the ability to take risks, organise, and plan production effectively, and coordinate the other factors of production in the pursuit of profits. 

All countries have a finite amount of these factors of production of land, labour, capital, and entrepreneurship. 

Based on these assumptions, it is clear that it is not possible to produce all that we want, given that the factors of production are limited while man's wants are unlimited. Some goods will have to be sacrificed to obtain more of other goods. 

Put another way, this situation is one of scarcity, and scarcity necessitates choice. 

This means that a rational choice has to be made of what to produce, how to produce, and for whom to produce. 

Since something has to be forgone, there is a "cost" involved. In a world of scarcity, there is a cost of sacrifice involved in satisfying a particular want. 

This cost is called opportunity cost, and is defined cost of the next best alternative foregone to satisfy the particular want.

The way in which a free market mechanism with minimal government intervention solves the CPE is through the price mechanism.  

The intersection of demand and supply determines the market equilibrium (or market clearing) price and output, which will resolve the issues of what to produce (by signalling the price or value of the good), how to produce (producers will ensure they find cost-effective methods of production), and for whom to produce (those who can afford it). 

In conclusion, the statement “The Central Problem of Economics (CPE) is about scarcity and choice” is true to a large extent, because this is the main problem that all demand and supply models are intended to address, and which all economics students are putting under the microscope. 

I think that although this issue is generally quite simplified as a heuristic, the CPE is indeed about scarcity necessitating rational, logical choices and that is what economics is all about.  

*** ***

JC ECONOMICS ESSAYS Tutor's Comments: Well written, interesting and insightful. Brilliant effort! Do please think of how you would draw and label the PPC/PPF properly? Do also think about other alternative ways of approaching this JC economics question. Other than this economic approach, how else could this economics essay have been answered? Thank you for reading this sample essay, and cheers. 

Economics Quotes from Famous Economists

Here are some of my favourite economics quotes from famous economists, as well as famous, popular economics quotes:

Adam Smith

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

The Wealth of Nations (1776)

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

The Wealth of Nations (1776)

Friedrich Hayek:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order.

The Fatal Conceit : The Errors of Socialism (1988)

Ludwig von Mises:

The capitalist system of production is an economic democracy in which every penny gives a right to vote. The consumers are the sovereign people. The capitalists, the entrepreneurs, and the farmers are the people’s mandatories. If they do not obey, if they fail to produce, at the lowest possible cost, what the consumers are asking for, they lose their office. Their task is service to the consumer. Profit and loss are the instruments by means of which the consumers keep a tight rein on all business activities.

John Maynard Keynes:

The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again. (1923)

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

Lord Lionel Robbins:

Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

Milton Friedman:

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse.

One of the great mistakes is to judge policies and programs by their intentions rather than their results.

The ultimate goal of a positive science is the development of a "theory" or, "hypothesis" that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed.

Consider the problem of predicting the shots made by an expert billiard player. It seems not at all unreasonable that excellent predictions would be yielded by the hypothesis that the billiard player made his shots as if he knew the complicated mathematical formulas that would give the optimum directions of travel, could estimate accurately by eye the angles, etc., describing the location of the balls, could make lightning calculations from the formulas, and could then make the balls travel in the direction indicated by the formulas. Our confidence in this hypothesis is not based on the belief that billiard players, even expert ones, can or do go through the process described; it derives rather from the belief that, unless in some way or other they were capable of reaching essentially the same result, they would not in fact be expert billiard players.

JC Economics Essays - H1, H2, H3 A level Economics essays and economics tutorial materials. Economics quotes from famous economists can be used in H3 economics essays.