Building Blocks in Economics — The Problem of Choice — Practice

Question 1

What is scarcity in economics?

Accepted Answer

The situation where wants are unlimited but the resources to satisfy them are limited.

✦ Answer: limited resources relative to unlimited wants.

Question 2

Give one example each of a need and a want.

Accepted Answer

✦ Answer: need — food (or clothing/shelter); want — a smartphone (or a holiday).

Question 3

Name the four factors of production.

Accepted Answer

✦ Answer: land, labour, capital and entrepreneurship (enterprise).

Question 4

Define opportunity cost and give an example.

Accepted Answer

Step 1 — Opportunity cost is the value of the next-best alternative you give up when you make a choice.

Step 2 — Example: if you use ₹100 to buy a book instead of a movie ticket, the opportunity cost of the book is the movie you gave up.

✦ Answer: the next-best alternative sacrificed; e.g. the movie given up to buy a book.

Question 5

Why does scarcity lead to the problem of choice?

Accepted Answer

Step 1 — Because resources are limited, they cannot satisfy all our unlimited wants at once.

Step 2 — So we must choose which wants to satisfy — and choosing one means giving up another.

✦ Answer: limited resources can't meet all wants, so we must choose among alternatives.

Question 6

State the three central problems of an economy.

Accepted Answer

Step 1 — What to produce (and how much).

Step 2 — How to produce (using more labour or more machines/capital).

Step 3 — For whom to produce (how the goods are distributed among people).

✦ Answer: what, how and for whom to produce.

Question 7

A government has funds to build either a road or a hospital, not both. Explain the choice using opportunity cost.

Accepted Answer

Step 1 — The funds (resources) are limited, so the government must choose one option.

Step 2 — If it builds the road, it gives up the hospital; the opportunity cost of the road is the hospital not built (and vice versa).

Step 3 — So the real cost of the road is the benefit of the next-best alternative — the hospital — that had to be sacrificed.

✦ Answer: the opportunity cost of the road is the forgone hospital — the value of the best alternative given up.

Question 8

Explain the 'how to produce' problem and what a country's choice depends on.

Accepted Answer

Step 1 — 'How to produce' asks which method to use — more labour (many workers) or more capital (machines).

Step 2 — The choice depends on which resources are cheaper and more plentiful; a labour-abundant country like India may use more labour-intensive methods, while a capital-rich country uses more machines.

✦ Answer: it is the choice between labour-intensive and capital-intensive methods, depending on which resources are cheap and available.

Question 9

Explain why every economy must solve the three central problems, with an example of each.

Accepted Answer

Step 1 — Because resources are scarce, no economy can produce everything, so it must decide WHAT to produce — e.g. more food grains or more cars.

Step 2 — It must decide HOW to produce — e.g. harvesting by hand (labour) or by machines (capital).

Step 3 — It must decide FOR WHOM to produce — how output is shared among people, e.g. through market prices or government distribution.

Step 4 — These arise directly from scarcity and are answered through the market, the government, or a mix of both.

✦ Answer: scarcity forces every economy to decide what (food vs cars), how (labour vs machines) and for whom (distribution) to produce.

Practice — Building Blocks in Economics — The Problem of Choice

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