The Basic Economic Problem
Is economics a science?
Similarities with natural sciences
• Tests propositions by examining how well predictions correspond to its theories in the real
world
• Hypotheses are developed and models are constructed to test them
• New theories are developed due to observations, hypothesis formations, predictions and
testing to either accept or reject these hypotheses
• Data is collected from quantitative such as experiments and interviews e.g. statistics and
mathematical theories are used to forecast trends (econometrics)
• The quantitative data is produced from a real-world setting, therefore is verifiable and
retested results
Differences with natural sciences
• Hard to predict theories since in natural sciences, theories can be tested in controlled
conditions. In the real world, modeling human behavior is difficult since theres no clear,
predictable patterns
• Cannot be tested in controlled conditions, so must test theories in other ways
• Lack of testable hypotheses since there's unlimited hypotheses and unseen variables
affect economic trends]
• Allows competition, contradictory theories co-exist, not proving others infeasible
This led to observers to call economics a dismal science
____________________________________________________________________________________________
LO: Explain the nature of scarcity and the basic economic
• The basic economic problem is
o The allocation of scarce resources which have competing uses between infinite
wants – unlimited wants + limited resources = scarcity
o It is the study of the choices made by economic agents, as resources have
alternative uses and wants are unlimited
• Economic agent is any individual, firm, government or organization that makes an
economic decision
• Scarcity is finite or limited resources e.g. land, water, oil, food
• Economics is seen as the study of scarcity since economic agents can only obtain a limited
amount of resources at any time, therefore making choices about how they are used
• Depletion – reduction in quantity
• Degradation – reduction in quality
• Needs and wants may differ in each country e.g. UK vs Bangladesh
, • An economic system
o It is a system that attempts to solve the basic economic problems
o In the UK we have a ‘mixed economy’
o It is the responsibility of the government and ‘markets to solve the basic economic
problems
• Market-based economy – free markets determine resource allocation
• Centrally based economy – government determines resource allocation
Market-based economy Centrally based economy
Advantages Disadvantages Advantages Disadvantages
- Competition = - Large MNC’s - People get what - Less wants are
innovation (multi-national they need met
- Variety of goods companies) get - Resources used - Lack of choice =
and services monopoly power for needs, not social unrest
- Demands more - Lots of needs wants - No competition =
likely to be met aren’t met - Keep economy no innovation
- Allows stable
firms/individuals - No money spent
to increase their on wants
income
• The purpose of economic activity is the production of goods and services to satisfy needs
and wants, to improve standard of living and quality of life
• A free good is a good for which there is no opportunity cost involved in its supply e.g. air or
water, but in some circumstances, it's not classed as a free good e.g. air could be polluted
____________________________________________________________________________________________
LO: Identify the three questions of all economic ‘systems’ need to address
• Three questions are addressed in order to attempt to solve the basic economic problem
o What do produce? – some combination of goods and services e.g. insulin
o How to produce it? – some combination of our factors of productions e.g. imports
o For whom to produce it for – some/all sectors of the population e.g. diabetics
• Economics is about making choices about how individuals, businesses and governments
choose to allocate their scarce resources between competing uses
• An economic system is where different societies have produced different methods and
different frameworks for allocating resources
• Opinions and value judgements are a massive influence on decision making and
government policies e.g.
o UK healthcare system – universal access, ethically right
o USA healthcare system – shorter waiting lists, more investment in medical
research, self-funding
Is economics a science?
Similarities with natural sciences
• Tests propositions by examining how well predictions correspond to its theories in the real
world
• Hypotheses are developed and models are constructed to test them
• New theories are developed due to observations, hypothesis formations, predictions and
testing to either accept or reject these hypotheses
• Data is collected from quantitative such as experiments and interviews e.g. statistics and
mathematical theories are used to forecast trends (econometrics)
• The quantitative data is produced from a real-world setting, therefore is verifiable and
retested results
Differences with natural sciences
• Hard to predict theories since in natural sciences, theories can be tested in controlled
conditions. In the real world, modeling human behavior is difficult since theres no clear,
predictable patterns
• Cannot be tested in controlled conditions, so must test theories in other ways
• Lack of testable hypotheses since there's unlimited hypotheses and unseen variables
affect economic trends]
• Allows competition, contradictory theories co-exist, not proving others infeasible
This led to observers to call economics a dismal science
____________________________________________________________________________________________
LO: Explain the nature of scarcity and the basic economic
• The basic economic problem is
o The allocation of scarce resources which have competing uses between infinite
wants – unlimited wants + limited resources = scarcity
o It is the study of the choices made by economic agents, as resources have
alternative uses and wants are unlimited
• Economic agent is any individual, firm, government or organization that makes an
economic decision
• Scarcity is finite or limited resources e.g. land, water, oil, food
• Economics is seen as the study of scarcity since economic agents can only obtain a limited
amount of resources at any time, therefore making choices about how they are used
• Depletion – reduction in quantity
• Degradation – reduction in quality
• Needs and wants may differ in each country e.g. UK vs Bangladesh
, • An economic system
o It is a system that attempts to solve the basic economic problems
o In the UK we have a ‘mixed economy’
o It is the responsibility of the government and ‘markets to solve the basic economic
problems
• Market-based economy – free markets determine resource allocation
• Centrally based economy – government determines resource allocation
Market-based economy Centrally based economy
Advantages Disadvantages Advantages Disadvantages
- Competition = - Large MNC’s - People get what - Less wants are
innovation (multi-national they need met
- Variety of goods companies) get - Resources used - Lack of choice =
and services monopoly power for needs, not social unrest
- Demands more - Lots of needs wants - No competition =
likely to be met aren’t met - Keep economy no innovation
- Allows stable
firms/individuals - No money spent
to increase their on wants
income
• The purpose of economic activity is the production of goods and services to satisfy needs
and wants, to improve standard of living and quality of life
• A free good is a good for which there is no opportunity cost involved in its supply e.g. air or
water, but in some circumstances, it's not classed as a free good e.g. air could be polluted
____________________________________________________________________________________________
LO: Identify the three questions of all economic ‘systems’ need to address
• Three questions are addressed in order to attempt to solve the basic economic problem
o What do produce? – some combination of goods and services e.g. insulin
o How to produce it? – some combination of our factors of productions e.g. imports
o For whom to produce it for – some/all sectors of the population e.g. diabetics
• Economics is about making choices about how individuals, businesses and governments
choose to allocate their scarce resources between competing uses
• An economic system is where different societies have produced different methods and
different frameworks for allocating resources
• Opinions and value judgements are a massive influence on decision making and
government policies e.g.
o UK healthcare system – universal access, ethically right
o USA healthcare system – shorter waiting lists, more investment in medical
research, self-funding
