Worked example 1
A country has a fixed amount of farmland, labour and machinery, but its people want more housing, more food and more leisure facilities than can be produced.
(a) Explain why this is an example of the economic problem. (b) One area of land could be used for either 400 new houses or 1 000 tonnes of wheat per year. The government chooses the houses. State the opportunity cost of this decision. (c) Explain whether the wheat is an economic good or a free good.
Show solution outline
Step 1 — Identify the two sides of the problem: wants are unlimited (people keep wanting more housing, food and leisure) while resources — land, labour and capital — are finite. Scarcity forces a choice.
Step 2 — The economic problem (a): because not every want can be met, the country must decide what to produce, how to produce it and for whom. That is the economic problem, and it applies to every economy, rich or poor.
Step 3 — Opportunity cost (b): choosing the houses means giving up the next best alternative: 1 000 tonnes of wheat per year. Opportunity cost is measured in the good forgone, not in money.
Step 4 — Economic or free good (c): growing wheat uses scarce resources (land, labour, seed) and so has an opportunity cost — it is an economic good. A free good, such as air or sunlight, is not scarce and has no opportunity cost.
Exam tip: always name the specific alternative forgone; "the money spent" is never the opportunity cost.