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.
