“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.  

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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. 

Generally, individuals and firms are assumed to be motivated by self-interest. Explain the central economic problem of limited resources and unlimited wants. [10]

This essay question is adapted from an actual A level economics essay examination

This economics essay is about the central problem of economics, and explains that the pursuit of self-interest by individuals and firms results in an efficient allocation of earth’s resources through the price mechanism, which solves the problem of scarcity and the central economic questions of what to produce, how to produce, and for whom to produce. Any society, whether capitalistic, socialist, or a command economy, needs to answer these three important economic questions. 

Human wants are unlimited, while the factors of production used to produce goods and services to meet human wants, which are land, labour, capital, and entrepreneurship are limited. Land refers to gifts of nature and natural resources, like physical land, oil, and natural gas. Labour refers to manpower and man’s efforts and “human capital”. Capital in economics often refers to goods that produce other goods, for example, machinery. And entrepreneurship refers to human risk taking and decision making to coordinate the limited resources available, and as Schumpeter once said, entrepreneurs use “creative destruction” to keep the economy humming with new goods and services that displace older goods and services. These four resources are limited, but are most importantly required to produce goods and services. 

However, human wants are unlimited; for example, people need food, clothing, housing, transportation, leisure and entertainment, education, and many other goods and services to meet their material standard of living. This situation of limited factors of production of land, labour, capital, and entrepreneurship, but unlimited human wants, results in scarcity. 

Scarcity necessitates choice, which means that rational economic choices have to be made to allocate the resources to competing uses. One related important economic concept here is the idea of opportunity cost, which is the cost of the next best alternative – rationally, as resources are scarce, allocating resources to one purpose means forgoing the next best alternative. In other words, there are trade-offs that arise from the allocation of the factors of production to competing uses. 

However, there is a solution that addresses the central problem of economics. 

This solution is the free market, with the price mechanism, which as Adam Smith once said, acts like "an invisible hand" that coordinates the matching of limited resources to competing uses. According to economic theory, this is the intersection of demand and supply that determines the optimal price and the quantity eventually produced, ceteris paribus. Ceteris paribus is the condition that all other factors remain constant; one example here is that, for the price mechanism to allocate resources efficiently, there should be no market failures resulting in allocative inefficiency. Demand is defined as the willingness and ability to purchase a good or service, ceteris paribus, while supply is defined as the willingness and ability to produce a good or service, also ceteris paribus. In economic theory, the optimal price and economic output of goods and services are the outcome of rational choices of millions, if not billions, of suppliers, producers, and firms meeting the requirements of millions of consumers, individuals, and households. 

In conclusion, the pursuit of self-interest by individuals and firms utilises the price mechanism to address the economic problem of scarcity, and it is the intersection of demand and supply that leads to an efficient allocation of scarce economic resources.

Economics Tutor's Comment - This is an excellent effort for the A levels and covers a few important economic concepts and arguments. However, it takes a slightly different approach compared to other economics essays on the central problem of economics that, for example, talk about signalling, rationing, incentivising effects of prices. What is the limitation of using that kind of approach? Also, it could be improved with the use of an economics diagram, and explaining the diagram could also add higher order reasoning to this paper. Nonetheless, it is still quite clear that this student’s economic theory is quite strong. Always think about what you could do to make your economics essays even better. Thank you for reading. Cheers!  

JC Economics Essays - This economics essays blog helps economics students with the A-Levels (Cambridge, A1/S, A2, A H1/H2/H3 levels), and even the international AS level economics examinations. IB students can also benefit from the economics content in JC Economics Essays. This top-quality economics essays website provides a range of relevant and useful economics content, materials, tips and techniques, and model economics essays that students in the United Kingdom and Singapore, and all around the world, can use to excel in their studies and economics examinations.

This model essay with economics tutor’s comments was contributed by WT, our Economics expert who helps students understand the beauty of Economics and its applications. WT has a strong interest in Econometrics, Economic History, International Trade, and Game Theory. This economics post was edited by SS, the editor of JC Economics Essays.

Consumers and producers are generally assumed to be motivated by self-interest. Explain how the pursuit of self-interest can help to address the central economic problem of limited resources and unlimited wants. [10]

Adapted from an actual economics essay examination

This economics paper explains that the pursuit of self-interest results in an efficient allocation of resources through the price mechanism, which addresses the problem of scarcity. 

Human wants are unlimited, while earth's resources of land, labour, capital, and entrepreneurship are limited. This results in scarcity. What is scarcity? It refers to the situation where resources that are limited are not able to meet the requirement of unlimited wants. However, there is a solution to meeting these two different imperatives - and that is the free market, with its price mechanism, which as Adam Smith said, acts like "an invisible hand". 

The price mechanism means that it is the intersection of demand and supply that determines the price and the quantity eventually produced. It is the rational choice of millions of suppliers, producers, and firms meeting the requirements of millions of consumers, individuals, and households. Demand is defined as the willingness and ability to purchase a good or service, ceteris paribus, while supply is defined as the willingness and ability to produce a good or service, also ceteris paribus. 

The price mechanism addresses the central problem of economics, coordinating resources to their best uses, and solving the problem of what to produce, how to produce, and for whom to produce, because it serves the important four functions of signaling, rationing, allocating, and incentivising. The signaling function is one where the price of a good allows for a re-calibration of the quantity demanded and quantity supplied. As the price of a good increases, indicating a more pronounced situation of scarcity, the quantity demanded of a good falls, while the quantity supplied rises, ceteris paribus. The converse is also true, where the fall in the price of a good, which indicates an amelioration of scarcity, results in an increase in the quantity demanded and a fall in the quantity supplied.

Given the prevailing market prices, buyers who seek to maximise their utility will demand the good. Under this demand function, those are willing and able to pay for the good are able to obtain it, while those who are not willing or able to pay will go without the good. Meanwhile, producers who are willing and able to produce the good at a cost below or equivalent to the prevailing market price will produce it, as they are incentivised to maximise profits, while those who produce at a cost above the market price will not. This also determines the allocation of resources that go into producing this good.

In conclusion, the pursuit of self-interest utilises the price mechanism to address the problem of scarcity, achieving an efficient allocation of resources.

Economics Tutor's Comment - This is a very strong effort for the A levels and covers quite a few important points and arguments. The candidate's use of economic theory is quite strong in this economics essay. However, one should not and cannot rest on one's laurels. What would make this economics essay even better? Thank you for reading. Cheers!  

JC Economics Essays - This economics essays site helps students with the A-Levels (Cambridge, A1/S, A2, H1/H2 levels), and the international AS level economics examinations. This blog provides a range of useful economics content, materials, tips and techniques, and model economics essays that students in the United Kingdom, and all around the world, can use to excel in their studies and examinations.

This model essay with sample comments was contributed by WT, our resident Economics expert who helps students understand the beauty of Economics and its applications in real life. WT has a strong interest in Econometrics, Economic History, International Trade, and Game Theory, especially applications to real life. This economics post was edited by S. S., the editor of JC Economics Essays.

What is the central problem of economics?

In this short and sweet post, we explain in simple and clear terms - What is the Central Problem of Economics?

Human wants are unlimited.

However, resources that can be used to produce goods and services to meet these unlimited human wants are limited. 

These limited or finite resources which are used to produce goods and services are called the factors of production. 

There are four main factors of production – they are land, labour, capital, and entrepreneurship (or enterprise). 

Land refers to all gifts of nature, such as land, natural resources, and water. 

Labour refers to human intellect, effort, hours, and expertise. Human capital refers to skilled labour. 

Capital refers to goods that can be used to produce other goods. 

Entrepreneurship refers to risk-taking behaviour to coordinate the factors of production of land, labour, and capital, to bring an increase in output from given inputs.  

The situation of unlimited human wants against the realities of limited resources is the central problem of economics. 

This central problem of economics is the problem of scarcity, where the factors of production are limited but human wants are unlimited. 

Scarcity necessitates rational choice among competing uses for the resources, which means that a rational choice has to be made about what to produce, how to produce, and for whom to produce. 

Choosing one option over another, or choosing one use of a scarce resource against another competing use for the same resource, leads to the concept of opportunity cost. 

Opportunity cost is defined as the cost of the next best alternative forgone. 

To address the problem of scarcity, there have been many mechanisms developed or evolved over the years to solve this allocation problem. 

One example is the command economy, where a central planner will decide what to produce, how to produce, and for whom to produce, and the central planner will allocate the factors of production to the areas of production deemed necessary, and then allocate the goods and services to the population according to certain principles (for example, socialist or communist principles). 

Another example is the free market economy, or capitalistic economy, where the price mechanism in the free market will allocate resources to competing uses. 

Assuming the conditions of perfect competition and perfect information, the unfettered free market allocates scarce resources efficiently to their best uses. 

According to Adam Smith, the father of economics, the free market operates like an “invisible hand”, coordinating the factors of production and goods and services. 

However, most economies in the world are actually mixed economies. 

Mixed economies refer to economies that are partly centrally run, and partly free market, or economies that generally utilise the price mechanism subject to some government intervention, to varying degrees.  

The study of economics generally assumes that the price mechanism is the most efficient way of allocating resources, given certain assumptions, and also allows for a certain degree of government intervention, especially to cure market failures, situations where the free market does not allocate resources most efficiently. 

Source: An abridged and adapted chapter from the powerful and simple concise economics guide - Success in Microeconomics (https://payhip.com/b/Az5w)  For more information, do get a copy of the e-book. Do support this economics guide, please. Thank you very much!

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Explain how benefits to the UK economy can arise from exchanges, arising from specialisation, to address the central problem of economics. [10]

This paper explains the benefits to the UK (United Kingdom) economy of exchanges arising from the price mechanism, arising from specialisation, that addresses the central problem of economics.

First and foremost, the central problem of economics, according to Lord Lionel Robbins of the London School of Economics, is basically about humans having unlimited wants, but because of limited resources of the factors of production of land, labour, capital, and entrepreneurship, people cannot have everything that they want. This is the situation of scarcity necessitating rational choice, given finite resources on earth to meet unlimited wants. 

There are a few keywords and core concepts that we need to address before we start on our essay. Exchanges refer to the movement of goods and services in exchange for money, in a free market economy. Specialisation refers to the division of labour that occurs in a free market economy that uses the price mechanism. Specialisation means that individuals or firms produce one good, and can thus reap economies of scale from it, where economies of scale refer to falling long run average costs (LRAC) a the scale of output increases. The central problem of economics can basically be addressed through the price mechanism in a free market economy, which refers to the intersection of demand and supply, where, as Adam Smith famously said, prices act as an “invisible hand” coordinating the factors of production to allocate goods in the economy, solving the problems of "what" to produce, "how" to produce, and "for whom" to produce those very goods. This paper now explains the benefits to the UK economy of exchanges arising from specialisation.

First and foremost, the price mechanism and the concomitant specialisation that arises from it lead to efficiency in the UK market. There are many kinds of efficiency, but according to economic theory the price mechanism in a competitive market would be productive and allocative efficient, ceteris paribus. Productive efficiency means that the market produces at the lowest possible average price, while allocative efficiency means that the market produces also where P = MC, where MC means marginal costs. Alternatively, allocative efficiency can also be defined as where the market allocation is the socially optimal level for society, under conditions of no market failure. For example, if UK farmers specialised in the production of various crops  and then exchanged to get what they need for their daily needs, then the agricultural produce market would achieve productive and allocative efficiency, because UK farmers would produce at the bottom of their LRAC and thus achieve the Minimum Efficient Scale (MES), the lowest point of the LRAC. This would ultimately benefit UK consumers because of lower prices and greater output, the greatest benefits of productive and allocative efficiency.

At the same time, beyond microeconomics, this question also asks about the UK economy. For the larger economy, specialisation would lead to an economy that could exchange goods internationally. International trade is defined as the exchange of goods and services across international boundaries. If the UK specialises, for example, in the production of capital intensive goods, such as cars and technological products, and then trades with another country, say China which specialises in the production of labour intensive goods, such as clothing, then trade can take place, which could increase UK’s actual growth, as AD  = C + I + G + (X-M). This is basically the benefit of specialisation and exchange on the international stage, called comparative advantage, where one country specialises and produces a good it has a lower opportunity cost of producing, and then exchanges it for a good in which it has a comparative disadvantage in, which leads to a higher consumption possibilities. 

In conclusion, it can be argued that exchange and specialisation to solve the central problem of economics can benefit the UK economy in terms of promoting productive, allocative efficiencies, as well as international trade because of comparative advantage for the benefit of the UK's economic growth. 

JC Economics Essays - This excellent economics essay, written under examination conditions, was kindly contributed by S. S., who achieved an grade A for H2 Economics at the A level examinations and also a Merit for H3 Economics. He achieved a university place at the London School of Economics and received good recommendations and testimonials from his economics and civics tutors. Special thanks for the kind and useful contribution. What can we learn about writing good economics essays from this sharing? Thank you for reading, and cheers. 

E-Book: Success in Microeconomics - A Concise Companion to Core Concepts

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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. 

Compare and contrast the various types of economic efficiencies. [10]

Compare and contrast the various types of economic efficiencies. [10]

The fundamental economic problem is a problem of scarcity, necessitating choice. This is because human wants are potentially unlimited, but resources are limited, and hence choices have to be made, “efficiently”, between competing uses for the same resources. The scarce resources, or factors of production, are land, labour, capital, and entrepreneurship. Land refers to resources, gifts of nature, and other natural factors. Labour refers to human effort and work. Capital refers to any good that can be used to produced another good. Entrepreneurship refers to risk-taking, organisation, and business acumen, among other things. It can be said that efficiency is concerned with the optimal production and distribution of society’s scarce resources. This economics essay compares and contrasts the various main types of economic efficiencies – productive efficiency, allocative efficiency, dynamic and static efficiency, X-inefficiency, social efficiency, and Pareto efficiency.

Productive Efficiency

First, productive efficiency occurs when the maximum number of goods and services are produced with a given amount of inputs. This will occur on the production possibilities curve or production possibilities frontier (PPC or PPF), meaning that any point along the PPC will be productively efficient. On the PPC, it is impossible to produce more goods without producing fewer services. Productive efficiency will also occur at the lowest point on individual firms’ average cost curves (AC curves). This is because productive efficiency can be thought of as the method of least cost production, which means that production costs are minimised. Productive efficiency is not the same as the other types of efficiencies.

Think: how would you draw the PPC?

Allocative Efficiency

Second, allocative efficiency occurs when goods and services are distributed according to society’s preferences or when they are allocated in accordance with maximising society’s welfare. An economy could be productively efficient but produce goods that people that do not need, and this would be allocatively inefficient. In other words, allocative efficiency is a subset of productive efficiency, where productive efficiency is a necessary condition of allocative efficiency. (A necessary condition is a condition for some state of affairs that must be satisfied before the state of affairs can be obtained.) It should be noted that allocative efficiency occurs when the price of the good produced by a firm equals the marginal costs of production.

Dynamic Efficiency

Third, dynamic efficiency refers to efficiency over time, whereas static efficiency refers to efficiency at a particular point in time. The first concept has the element of time taken into consideration whereas the other does not consider time. Dynamic efficiency involves the introduction of new technology and working practices to reduce costs over time, whereas static means “at a fixed point in time”. Basically, this concept of dynamic means that there are changes over time whereas static means that time is held, as it were, frozen.

X-inefficiency

Fourth, X-inefficiency occurs when firms do not have incentives to cut costs. This is usually associated with monopolies, which usually pursue rent-seeking behaviour rather than think of how to lower costs. For instance, a monopoly which makes supernormal profits may have little incentive to get rid of surplus labour. Therefore, a monopolistic firm’s average costs may be higher than necessary.

Social Efficiency

Social efficiency occurs when externalities are taken into consideration and occurs at an output where the social cost of production (SMC) = the social benefit (SMB), or alternatively, the marginal social costs (MSC) = the marginal social benefits (MSB). This is closely related to both the concepts of allocative and Pareto efficiency, also known as Pareto optimality. Pareto efficiency or optimality is defined as a situation where it is not possible to make one party better off without making another party worse off. Hence, Pareto efficiency is socially efficient and also allocatively efficient, at society’s level.

Conclusion

In conclusion, there are many efficiency concepts in Economics and it is important to understand economic efficiency. Many of the concepts are related and can be understood in relation to each other.

JC Economics Essays – Tutor’s Commentary: This is a good introduction to the various “efficiencies” that Economics has to offer, not just at ‘A’ levels, but also at O, AS levels and introductory undergraduate Economics as well. ‘A’ level Economics can be quite esoteric, it is true, and this Economics material might seem difficult. Think positively instead: how could you make this Economics essay comprehensible and easily understood by you? Let’s do some counterfactual experiments here. Put yourself in the role of the Economic tutor, the examiner, or the lecturer, and you were marking this essay paper. If you were an Economics tutor, how would you judge this essay? What were its strengths and weaknesses, and why do you think – as a professional Economics tutor – those parts of the Economics essay were strengths or weaknesses? Thanks for reading, all the best and good luck!

“The Central Problem of Economics is scarcity and choice.” Is this statement true?

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

Scarcity is defined as a situation in which resources are not enough to satisfy everybody’s wants. The outcome of satisfaction is not to the level we want it to be. Scarcity is the most fundamental concept in Economics. Scarcity is based on a few assumptions.

First, the fundamental assumption is that man’s wants are unlimited. Man is never satisfied with his current level of consumption, and he always wants more. Second, is that the world’s resources are limited. These resources are the factors of production of land, labour, capital, and entrepreneurship. Land refers to natural resources and all the fruits of the earth. Labour refers to human effort and skill. Capital refers to any machine or technology that can produce things. 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.

Based on these assumptions, it is clear that it is not possible to produce all that we want, given that resources are finite while man's wants are unlimited. Some goods will have to be sacrificed to obtain more of other goods. This means that a choice has to be made.

To illustrate this concept, a man has a certain amount of money to spend. He decides to spend it all on sweets and chocolates. He can spend half his money on sweets, and the other half on chocolates. If he wants more sweets, he will have to give up some chocolates and vice versa. In the same way, for a firm, its resources are limited. If it decides to produce more of product A, it has to give up some production of good B. Thus, scarcity applies both to consumers and producers.

Figure 1: Production possibility curve/ Production possibilities frontier

The Production Possibility Curve (PPC) further illustrates scarcity. The PPC shows all the possible combinations of 2 goods which a firm can produce, given a fixed amount of resources. At combination a, the producer can produce 100 units of X and 0 units of Y. While at combination b, he can produce 200 units of Y and 0 units of X. He may also choose to produce at c, 70 units of X and 150 units of Y. All these combinations are possible combinations of goods that can be produced. To produce more of one good, tha other has to be sacrificed. Combinations d and e are not attainable, which also shows scarcity. It is the same at country level.

Scarcity forces us to choose. Since we cannot have everything, we have to decide on which one we will have to forgo. Since comething has to be forgone, there is a cost involved. In a world of scarcity, there is a cost of sacrifice invlved in satisfying a particular want. This cost is called opportunity cost, and is defined a the highest valued alternative that had to be foregone to satisfy the particular want.

The basic economic problem is scarcity. Because of scarcity, we have to choose carefully on the use of our limited resources. The consumer faces the problem of satisfying his unlimited wants. He wants to have infinite satisfaction, from his finite purchasing power. Scarcity makes this impossible. As such, he will have to make a choice, based on relative opportunity costs, on which goods and service he will spend. He will have to decide which goods he has to forego and which he wants to consume.

For a producer, he will want to make infinite profit, using his finite resources. Likewise, scarcity makes this impossible, and he will have to make a choice, based on relatve opportunity costs, on which good he wants to produce.

From a Macroeconomic perspective, the basic Macroeconomic concerns of the government are inome distribution and economic stability. The relative weightage given to these concerns will determien what type of policies the government decides to employ.

Income distribution is important to create a ‘fair’ and a ‘just’ state. This is a Macroeconomic objective, and it requires government intervention through progressive taxation, social insurance, benefits, etc. Reducing large income gaps and poverty are important goals of development and are hallmarks for civilised society. Extreme inequality and widespread poverty can result in socail nhappiness and unrest, which in turn result in political and social instablilty. The crime rate rises, illiteracy goes up, welfare costs rise, which all put a great strain on the economy.

The concept of scarcity comes into play here. Scarcity means that the resources of a counry are limited. As such, every available resource must be used to its fullest potential.The government needs to appreciate this when deciding the level of income equality it hopes to achieve.

If the poor are to be given a lot of financial aid, they may be spurred to urther improve their skills, and contribute more to the economy. As the saying goes, a happy worker is a good worker. Likewise, if the poor are left behind as the countyr pospers, they may feel alienated. As such, they may refuse to work and may even resort to illegal activities. Since the country’s population is limited, sih a waste of scarce resources would be disastrous.

However, if too much aid is given to the poor, and too much money is taken from the rich, a whole new set of problems may arise. The poor may start to become over-dependent on government aid. This is the situation currently occurring in many Western developed countries. The poor live of their welfare payments and they contribute nothing in return to society. To support such high amounts of aid, the rich would have to be taxed a high amount, which may result in great unhappiness and discontent. This may result in the rich evading tax payments or even force them to migrate to other countries that tax less. This scenario too would be detrimental to the economy as the government would receive lesser tax revenue.

The concerns highlighted above mean that the government will have to make tough decisions. The government will have to decide on the best policy based on the opportunity cost of the available measures.

In a free market economy, the pricing system is prone to high unemployment, inflation and Balance Of Payments (BOP) difficulties. Hence, the government seeks to stabilise the economy. In this, it has four aims.

First, is full employment. Unemployment wastes sarce resources, as stated above, and brings hardships to those without jobs. Full employment is not equal to zero unemployment. It is the employment level asociated with some frictional unemployment.

Second, is price stability. This provides a stable environment for investment and growth. Price stability is not zero inflation, but usually refers to 2-3% mild inflation that is necessary to stimulate growth.

Third, is a healthy BOP. This is to ensure healthy reserves and a stable exchange rate. Last is economic growth, which is the increase in real national income per capita, which should ensure higher living standards.

Ideally, the government would seek to achieve all these aims. However, this is not always possible. Sometimes, to achieve one aim, another has to be compromised. For example, there is large-scale unemployment due to the lack of demand. To counter this, the government will employ an expansionary fiscal policy to boost demand. Government spending on public projects will increase to boost demand. However, this may, in turn, cause demand-pull inflation.

Thus, the concepts of choice and cost come into play again. The government will have to make choices based on the costs of the different measures available. Hence the statement “The Central Problem of Economics is scarcity and choice” is true.

JC ECONOMICS ESSAYS Tutor's Comments: Well written essay, interesting and insightful! This is not how I would have addressed this particular Economics essay question, but this essay is well thought out and well written, covering most of the points and showing a range of Economics knowledge and depth of coverage. It is creative and interesting, and shows that students can craft a range of possible responses to economics essays. Brilliant effort! Do please think of how you would draw and label the PPC/PPF properly. 

Fundamentally, the central problem of economics has always been about scarcity necessitating choice, and hopefully that choice made by individuals, organisations like firms, or governments is a rational choice, although that is not always the case (since humans can be quite irrational). How this statement can be explained, however, can take on various forms, and the most common form is the one by Lord Lionel Robbins of the LSE (you can read up on him if you are interested). 

Therefore, the question arises: what would be the "standard" or proper examination technique for responding to this Economics essay question? How would Lord Lionel Robbins, famous for defining economics and for utilising the scarcity and choice approach, answer this question? Do also think about other alternative ways of approaching this question.Other than this creative and interesting approach, how else could this have been answered? Thank you for reading, and cheers.