2025 JC1 H2 Economics

Book 1
Central Problem of Economics
Name: ____________________

Class: ____________________

1. Introduction to Economics Pg. 1 – 2

2. Central Problem of Economics – Lecture Notes Pg. 3 – 22

3. Central Problem of Economics – Tutorial Worksheet Pg. 23 – 30

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your lecture notes and the SLS package?

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 As an introduction to the study of Economics, candidates should have an awareness of the nature of Economics
as a social science (as compared to the natural sciences) and the differences between positive and normative
economics, microeconomics and macroeconomics.

Theme 1: The Central Economic Problem

Theme 1 introduces candidates to the Central Economic Problem of unlimited wants and limited resources. The
scarcity of resources necessitates choice and leads to decision-making. Through examining the concepts of
scarcity, choice and opportunity cost, candidates will be able to understand the Central Economic Problem
facing societies, and how economic agents (consumers, producers and governments) use available information,
and also consider benefits, costs, constraints and perspectives, to make decisions, which may have intended
and unintended consequences.

This theme provides the foundation for the study of microeconomic and macroeconomic topics in Markets
(Theme 2) and the National and International Economy (Theme 3) respectively, where the decision-making
approach and concepts of scarcity, choice and opportunity cost recur.

Economics Content

1.1 Scarcity as the Central Economic Problem

1.1.1 Scarcity, choice and resource allocation

a. The Central Economic Problem is scarcity, arising from limited resources and unlimited wants

b. Scarcity implies that choices have to be made in the allocation of resources between different uses

c. When choices are made, trade-offs and opportunity costs are incurred

d. The concepts of scarcity, choice and opportunity cost can be explained from the perspectives of
different economic agents (consumers, producers and governments)

e. Production Possibility Curve (PPC) can be used to illustrate scarcity, choice, opportunity cost,
productive efficiency, full employment, unemployment or under-utilisation of economic resources
and changes in the productive capacity of an economy

1.1.2 Decision-Making Process of Economic Agents

a.
a. Objectives of rational economic agents: consumers aim to maximise utility (satisfaction), producers
aim to maximise profits and governments aim to maximise social welfare

b. In the pursuit of their objectives, economic agents gather information, weigh benefits and costs,
consider constraints and perspectives before making decisions. They take into account the intended
and unintended consequences, and any changes occurring, before reviewing the decisions

Additional information

A marginalist approach to weighing costs and benefits is expected.

An understanding of the concept of cost-benefit analysis (CBA) as a project analysis tool is not required.
An awareness of how consumers allocate resources to maximise utility is sufficient. The formal derivation of
utility maximisation is not required.

Concepts and Tools of Analysis

● Scarcity, choice and opportunity cost
● Production possibility curve (PPC)
● Marginalist principle
 Victoria Junior College
2025 JC1 H2 Economics
Introduction to Economics
What is Economics?

Economics is the study of how people make choices given the scarcity of resources, and
of the results of those choices for society.

The study of Economics is typically classified into 2 broad branches: Microeconomics and
Macroeconomics.

Microeconomics Macroeconomics
● Deals with the analysis of individual ● Deals with the analysis of the economy
parts of the economy. as a whole.

● Studies ● Studies
- Decisions of individual economic agents ● Collective decisions of all
(households and firms) in individual households and firms in aggregate
markets (e.g. market for cars) markets (e.g. a country’s total
- The workings of individual markets – output) and the outcomes of these
how price and output in specific markets decisions on the economy.
(e.g. cars) are determined and how ● The workings of aggregate markets
related individual markets (e.g. bus – how the general price level and
rides) are affected. country’s total output level, and
employment level are determined.

Examples, using the context of crude oil prices:

Microeconomic issue Macroeconomic issue
● Why is there a rise in the price of crude ● Why is there an increase in Singapore’s
oil in recent times? general price level in recent times?

● How will the rise in price of crude oil ● How will the rise in crude oil prices affect
affect the price of electricity? Singapore’s general price level?

Economics as a social science

Economics is a social science. A social science is the study of societies and how people
behave. Other examples of social sciences are geography, sociology and political science.
The subject content of economics is thus all the theories or models that economists have
developed over time to explain economic behaviour. It is a way of thinking about the world.

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Positive vs. Normative Economics

● As a social science, economics uses objective analysis to make inquiry i.e. ‘what is’.
✔ Positive Economics

● When opinions and value judgments are interjected into the analysis i.e. what ‘should
be’ or ‘ought to be’.
✔ Normative Economics

Positive Economics Normative Economics

● Objective statements that explain ● Subjective statements that tell us what
what is, was or will be. ought to be or should be.

● It describes. ● It prescribes.
[can be historical or projected [mainly asserting opinions/viewpoints]
outcomes in future].
● Involves value judgement that cannot be
● Involves testable theories and empirically tested.
deals with facts.
[Note: claims of factual truth may
turn out to be false.]
● Disagreement cannot be settled by an
appeal to facts.
● Disagreement can be settled by an
appeal to facts. ● E.g. The government should not allow the
price of rice to rise.
● E.g. If the price of rice rises, people
will buy less of it.

Economic theories or models are simplified representations of real-world systems or

parts of a system. An economic model consists of three parts: variables and their
definitions, assumptions relating to those variables, and predictions.

Example:
According to the model of demand and supply, holding other factors constant
(assumption), adverse weather conditions will lower the supply of agricultural products like
rice and lead to a rise in their prices (prediction).

Extra! - A point about economic theories or models

Economic models aim to explain general phenomena and are applicable only when their
assumptions hold.

One common assumption made in economic analysis is the ceteris paribus condition –
i.e. only one variable or factor changes and all other variables or factors are held
constant. The idea is to isolate the variable that is of interest and its impact by assuming
that nothing else of importance will change, so as to simplify the economic analysis.

Note that many assumptions are often criticised for being unrealistic and may not hold
in the real world. Hence, when we discuss the impact of a change in one variable or impact
of a factor on another variable, we also evaluate the validity of the assumptions we make
in our economic analysis.

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 Victoria Junior College
2025 JC1 H2 Economics
The Central Economic Problem
Unit Summary

Economics is concerned with the production and consumption of goods and services.
Societies face the problems of:

(1) What goods and services to produce and in what quantities (i.e. how much)?
(2) How to produce them?
(3) For whom to produce?

These 3 questions arise because of the central economic problem faced by all individuals
and all societies – the problem of scarcity, where there are insufficient resources to satisfy
the unlimited wants of economic agents. Answering these questions entail making choices,
and every choice results in an opportunity cost.

Economic agents make decisions, identifying their highest-ranked choice that maximises their
well-being (subjected to the constraints faced), while accepting the trade-offs of their
decisions. At the societal level, the challenge is to choose in a way that can make best use of
scarce resources, e.g. such that welfare is maximised.

LECTURE SYNOPSIS

1. SCARCITY, CHOICE & RESOURCE ALLOCATION

1.1 Scarcity
1.2 Factors of production
1.3 Scarcity and inevitability of choice by economic agents
1.4 Opportunity cost and trade-offs in resource allocation

2. RATIONAL DECISION-MAKING PROCESS BY ECONOMIC AGENTS

2.1 Objectives of different economic agents – consumers, producers and the government
2.2 Recognising constraints
2.3 Weighing marginal benefits and costs (marginalist principle)
2.4 Gathering information and considering perspectives
2.5 Impact of decisions: Recognising intended and unintended consequences

3. THE PRODUCTION POSSIBILITIES CURVE MODEL

3.1 Constructing the PPC
3.2 PPC and microeconomic concepts
3.3 Shifting of the PPC
3.4 Economic objectives of efficiency and equity

REFERENCES
1. Sloman J., Garratt D. and Guest J. Economics. (11th edition). Chapter 1
2. Mankiw G., Quah E. and Wilson P., Principles of Economics - An Asian Edition. (3rd
edition). Chapter 1
3. Frank R. and Bernanke B. Principles of Economics. (5th edition). Chapter 1
4. McEachern W., Economics: A Contemporary Introducftion. (11th edition). Chapter 1
5. Miller R., Economics Today. (21st edition). Part 1
6. O Sullivan, Sheffrin, Lim and Seevaratnam. Principles of Economics. Chapter 1

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 Big Ideas
● Concept of scarcity
● Opportunity cost concept
● Marginalist Principle

Essential Questions Enduring understandings

At the end of the topic, you will understand that

1. Why do all individuals and societies The problem of scarcity is due to limited
face the problem of scarcity? resources in the world while society has
unlimited wants.

2. Why is scarcity a problem? Scarcity necessitates choice (decision making)

which results in opportunity cost.

3. What constitutes best use of scarce There are two microeconomic goals – 1) efficient
resources? resource allocation, 2) equitable (fair)
distribution of output. What constitutes the best
use of resources depends on the relative
importance that society places on each of these
goals.

4. How are rational choices made? Rational choice for efficient use of resources is
based on the Marginalist Principle of comparing
the marginal benefits against the marginal costs
of a decision.

5. What are the implications of this Choice gives rise to consequences – these can
choice? be intended or unintended.

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1. SCARCITY, CHOICE AND RESOURCE ALLOCATION

1.1 Scarcity
All societies face the central economic problem of scarcity, which is a situation in which
the resources available for production of goods and services are insufficient to satisfy all
human wants. This is because resources are limited but human wants are unlimited. Hence
some wants are not met.

A resource is scarce if the demand, at a price of zero, exceeds the available supply.
Practically all resources are scarce. A resource that is not scarce is called a free good (e.g.
sunshine).

THINK!
Is the air we breathe a scarce resource?
Yes and No.
No shortage of air to breathe even at zero price (i.e. when it is free).
But it also depends on how we define ‘air. If we define air as clean, unpolluted air, then in
some parts of the world it is scarce because resources have to be used to make clean
air available (e.g. installing air purifier).

1.2 Factors of production

In Economics, the resources that a society uses for producing goods and services are called
factors of production. They are typically divided into four categories:

▪ LAND
Refers to all the natural resources used or are available for the production of goods and
services. It could be renewable or non-renewable. Renewable natural resources renew
themselves at a fast enough pace for sustainable economic extraction (e.g. water, wind)
while non-renewable natural resources do not (e.g. fossil fuels, mineral deposits, soil).

▪ LABOUR
Refers to the physical and mental effort of people used or are available for the production
of goods and services (e.g. the work of engineers, financial analysts, factory workers,
soccer players & coaches).

▪ CAPITAL
Refers to all the man-made physical assets used or are available for the production of
other goods and services. These may be fixed or circulating capital:
- Fixed capital is durable and is used time and time again in the production process (e.g.
factory buildings, stadium, school building, machinery and equipment).
- Circulating capital (or inventories) refers to items such as raw materials and semi-
finished goods and stocks of finished goods waiting to be sold (also known as
inventories), e.g. goods in the warehouse, flour in bakeries, clothes in the clothes store.

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 THINK!
Is money capital?
Although money is commonly referred to as capital, it is not capital in economic terms.
It is used to purchase capital but is not itself capital as it does not produce anything.

▪ ENTREPRENEUR
Refers to a person who:
a. undertakes the risks of production: the uninsurable risks of earning losses as a result
of undertaking production.
b. organises production: combines the other factors of production (land, labour, capital)
to produce a good or service.
c. innovates: develop new products or new methods of production.

The entrepreneur is the person who takes the overall responsibility for the decision-
making process in the firm such as deciding on what to produce, how much to produce,
how to produce, how the product will be marketed and so on (e.g. Mark Zuckerberg, Jeff
Bezos, Jack Ma, etc.).

THINK!
Is the principal of VJC considered labour or entrepreneur?
A: Labour. While the principal has some say in the hiring of staff and method of
production, he is not the person who combines land, labour and capital for production
purposes. He also does not bear any risks of earning losses. His factor payment is that
of wages and not profits (actually MOE doesn’t earn profits as VJC is a government
school that is not driven by profits).
e to teacher: This is meant to be a hinge Q whereby students’ answer can be evidence that
they h
Factor payments are income received
for supplying the factors of production
FOP Payment
Land Rent
Labour Wage
Capital Interest
Entrepreneurship Profits

THINK!
1. Label the types of Factors of Production (FOP) used to produce iPhones below:

Resource used Type of FOP Resource used Type of FOP

Factory building capital Machine operators labour

Assembly line robots capital Component parts (circuit capital

board, screen, case)
Software designer labour Ground that building is sited land

Delivery driver labour Business Owner entrepreneur

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1.3 Scarcity and inevitability of choice by economic agents
Scarcity of resources means that a choice has to be made. Scarcity gives rise to the
fundamental economic challenge of choice – how to allocate limited resources among
competing uses for the satisfaction of human wants.

Consumers, firms and the government have to make choices due to scarcity.
● Consumers have limited income and have to decide on what to buy since they can’t
buy everything they want.
● Firms can only afford to pay for a limited amount of resources and have to decide what
to produce and what resources to hire.
● Governments have limited budget and have to decide how to allocate their spending
(e.g. roads vs. defence vs. education vs. healthcare).

Reflection:
Think of instances when you are confronted with the need for choice due to scarcity.
- Limited free time over the weekend – need to choose between completing assignments
or watching a movie or catching up with old friends

Limited space \
1.4 Opportunity cost and trade-offs in resource allocation
When a choice is made, opportunity cost is incurred. This is because each time a scarce
resource is used to satisfy a want, an alternative want is sacrificed.

Opportunity cost is the cost of using resources for a certain activity, measured in terms of
the net benefit that could be derived from the next best alternative forgone.

Example for illustration:

A certain amount of resources can be used by a firm to produce the following:
i) Pharmaceutical drugs that can yield $4m of profits, or
ii) Residential accommodation that can yield $2m of profits, or
iii) Pineapples that can yield $0.25m of profits

The opportunity cost of using the resources to (i) produce the pharmaceutical drugs is the
sacrifice of the net benefit of $2m profits obtained from (ii) building residential
accommodation since this is the next best alternative (NOT the net benefit from both housing
and pineapples since the resources couldn’t have been used to produce both of these goods).

THINK!
What is your opportunity cost of spending this time to complete your SDL Economics
lesson package?
Answer: It depends what your next best alternative is. Benefit from doing Math homework?
Napping in the library? Chatting with friends at the canteen?

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2 RATIONAL DECISION-MAKING PROCESS BY
ECONOMIC AGENTS

Note: You will not be

required to draw this
diagram during the exams.

There are three key economic agents in any economy – consumers, producers and
governments. Economic agents interact with one another at both the national and
international levels. Due to the fundamental problem of scarcity, all three key economic agents
have to make decisions (choices).

The economic decision-making process

The process of decision-making requires every economic agent to deliberate on the choices
that are available to them. This process takes into account various considerations. To
achieve their objectives, economic agents must be cognisant of the constraints that they are
operating within. To ensure that the decision made is the best given their constraints,
economic agents consider both the costs and benefits of the decision made. In addition,
economic agents actively consider information and perspectives to weigh the costs and
benefits.

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2.1 Objectives of different Economic Agents
The choices made by consumers, producers and the government are based on their goals.
Economists generally make an assumption that rational economic agents aim to maximise
their self-interest.

● Consumers aim to maximise their net total utility (satisfaction) from buying goods
and services.

Net total utility = Total utility from good/service - Total spending on good/service
($) ($)

● Firms aim to maximise their profits from producing and selling goods and services.

Profit = Total revenue from selling - Total cost of producing the

good/service ($) good/service ($)

● In an economy, governments aim to maximise social welfare when making policy

decisions.

Social welfare = Total social benefit ($) - Total social cost ($)

2.2 Recognising Constraints

In achieving their objectives, economic agents must be aware of the constraints that they are
operating within, as this will determine the choices available to them. Economic agents will
then decide on the best-ranked choice that enables them to maximise their self-interest.

Examples of constraints faced by economic agents

● Households have limited income
● Firms have limited financial resources
● Governments have limited budget (which comes from the tax revenue collected)

In short, economic agents face budget constraints. Besides a budget constraint,

governments also face the constraint of the social and political acceptability of their chosen
method of intervention.

2.3 Weighing Marginal Benefits and Costs (Marginalist Principle)

Every economic decision is motivated by a set of benefits and a set of costs. In making any
decision, every economic agent would consider the monetary and non-monetary costs and
benefits of every possible choice.

The marginalist principle is a simple decision-making rule that helps economic agents to
make decisions. It involves weighing marginal costs and benefits. It helps them to decide if
they should continue or stop the current or existing activity in their usage of resources.

Economists use the term marginal change to describe a small incremental adjustment to an
existing plan of action.

● Marginal cost is the additional cost of doing one more unit of activity.

● Marginal benefit is the additional benefit from doing one more unit of activity.

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Important!

According to the Marginalist Principle, if MB>MC, it is rational to do the activity

or to do more of it since the addition to total benefit exceeds the addition to total
cost which means net total benefit is rising. On the other hand, it is rational not to
do it or to do less of it if MB<MC, since reducing the activity will lower total benefit by
less than total cost, thus increasing net total benefit. The optimal level of an activity
is attained when MB equals MC.

Illustration
Nike shoes cost $100 per pair. You already bought one pair. Based on the figures
below, you already enjoy $150 worth of net total benefit from buying one pair.

Net total benefit = Total benefit – total cost.

Should you buy 1 more pair?

If you are a rational decision maker, you will buy the 2nd pair since you derive $200
worth of satisfaction from it (in this case MB = $200) while it cost you only $100 (in
this case MC = $100). Buying the 2nd pair increases your net total benefit by $100
(since MB > MC for the 2nd pair).

Nike Additional Additional Addition to Total Total Net

shoes satisfaction cost net total Benefit Cost Total
(pair) derived from incurred benefit ($) ($) ($) Benefit
buying 1 more from buying ($)
pair (MB, $) 1 more pair
(MC, $)

1 250 100 150 250 100 150

2 200 100 100 450 200 250
3 150 100 50 600 300 300
4 75 100 -25 675 400 275

Whenever MB>MC of an activity, net total benefit will be rising, and it is

therefore rational to increase this activity.

Think!
Based on the figures above, will you buy the 4th pair of shoes? How many
pairs will you buy?
No. for the 4th pair, MB<MC. Buying it lowers net total benefit.
I will buy 3 pairs. At this level, net total benefit is maximised.

When the value of an activity is continuous rather than discrete, net total benefit
is maximised exactly at the point where MB=MC.

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2.4 Gathering Information and Considering Perspectives

Gathering Information

In order to make sound decisions, economic agents have to first gather accurate information,
both quantitative and qualitative, on the costs and benefits of every available choice.

Consumers’ buying decisions are aimed at maximising net total utility (satisfaction). They
will obtain information that aid them to weigh private benefit and costs of different
goods/services e.g. benefits from different goods/services that accrue to the buyer of the good
– this requires them to find out the features of different goods/services, prices of different
goods / services etc.

Firms’ production and selling decisions are aimed at maximising total profits. Just like
consumers, they will obtain information that aids them to weigh private benefit and costs. This
requires them to do market research to find out (i) the tastes of consumers, and (ii) the costs
of inputs, whether purchased (e.g. raw materials, labour) or provided by the entrepreneur (e.g.
the opportunity cost of using his own shop space), needed to produce the goods/services.

In many economies, the government seeks to maximise society’s welfare. Its intervention
decision is aimed at maximising net total social benefit. It will obtain information that aids them
to weigh social benefits and costs. i.e. the benefits that accrue to the consumers (e.g. the
income that they are likely to earn as a result of receiving education) plus the benefits that
accrue to third parties who benefit from those who consume education (e.g. a more civil
society); the costs of production by firms (e.g. costs of land, building materials, teachers’
salaries) plus costs borne by third parties (e.g. due to noise pollution from building the school).

Considering Perspectives

Economic agents do not make decisions in isolation of others, since the impact on and
subsequent reaction of those affected by the decisions may in turn affect the intended outcome
of the decision made. E.g. the profit-driven producer considers the perspectives of the
consumers in analysing the effectiveness of marketing strategies employed (e.g. will
consumers respond well to strategy X?), while governments consider the perspectives of
stakeholders (e.g. residents, political supporters) in their policy decisions.

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2.5 Impact of decisions: Recognising intended and unintended
consequences
Economic decisions are often made to tackle or mitigate economic problems, and the impact
of such decisions can be analysed in terms of intended and unintended consequences.

● Intended consequences of the economic decision –

Economic agents make decisions with the expectation that the decision will achieve its
intended outcome and hence resolve the economic problem.

● Unintended consequences of the economic decision –

Unintended consequences refer to the outcomes that are not intended in the economic
decision.

Decisions made by economic agents can have multifaceted implications. The decisions
made by consumers or firms may not just impact the decision maker but can have impact on
other economic agents. Moreover, the decisions made by economic agents at the national
level can also have an impact at the international level.

Example 1
A firm discovers the technology of producing smartphones and decides to produce a certain
number of smartphones after establishing that it should be profitable to do so. The smartphone
turns out to be a hit with consumers. Consumers who bought it felt that it was good value for
money (intended positive consequence of consumers’ decision-making). Firms earn their
expected profits (intended positive consequence of firm’s decision making).

Plastic is needed to produce smartphones. The resulting increase in production of plastic

results in increased air pollution (unintended negative/adverse consequence). This can in
turn contribute to global warming.

Unintended consequences may occur because economic agents may not have made their
decisions under perfect information, which may be due to an inability to have access to
complete information or to consider all perspectives. Moreover, decision making is not made
in a static environment – rather, the conditions in the internal (e.g. a firm may open more retail
branches) or external (e.g. competitors may have started selling something similar)
environment are subject to constant and unpredictable change. This causes the decision
made by the economic agent to be less than optimal.

When unintended consequences occur, the economic decision-making process becomes

more complex. Economic decisions may have to be reviewed and/or measures to
manage any adverse impact of these consequences may have to be introduced. This
would entail taking into account additional and/or new information concerning the benefits and
costs of decisions made.

The idea of ‘unintended consequences’ is especially relevant when it comes to

the critique (or evaluation) of government policies. For example, if a
government were to ban the sale and consumption of cigarettes, an
unintended consequence is that black markets could emerge, where people
seek out cigarettes from illegal sources.

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3. THE PRODUCTION POSSIBILITIES CURVE MODEL
Definition
A Production Possibilities Curve (PPC) shows the combinations of the maximum amount
of two goods that an economy can produce within a certain period, usually a year, with a fixed
level of technology and when all available resources are fully and efficiently employed.

3.1 Constructing the PPC

Assumptions underlying construction of a PPC Critical thinking
● A specific period e.g. on a yearly basis. Why do we have these
● State of technology (application of knowledge to assumptions?
how goods are produced) unchanged. What will happen if these
● Total available resources remain the same. assumptions are relaxed?
● Efficient use of all resources – meaning that all
resources are fully employed, and the latest technology is utilised.

Example

Table 1: Possible combinations of capital and consumer goods

Alternative Quantity of consumer Quantity of
Combinations goods (units) capital goods (units)
A 0 50
B 10 48
C 20 45
D 30 40
E 40 33
F 50 23
G 60 0

Diagram 1 : Production Possibilities Curve

Capital goods 60
(units) A
50 B
C
D Y
40
E
30
X F
20
10
0 G
0 10 20 30 40 50 60
Consumer Goods
(units)

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3.2 PPC and microeconomic concepts
Using the PPC to illustrate concepts of scarcity, choice, opportunity cost and
productive efficiency

Scarcity

The PPC separates attainable combinations from the unattainable combinations.

▪ Combinations beyond the PPC (e.g. point Y) are desired due to unlimited wants but
unattainable due to limited resources (i.e. scarcity).
▪ Combinations on the PPC (e.g. points A, B, C, D, E, F) and inside the PPC (e.g. point
X) are attainable.
CONNECT - How
does society
Choice (involves movement along the PPC) decide where to
produce on the
The economy must decide which attainable combination to produce. PPC? [Refer to
In doing so, it decides on what to produce and how much to produce. Book 2 on Price
The chosen output combination is dependent on society’s preferences. Mechanism]
systems.]
Trade-offs & Opportunity cost

The PPC is downward sloping, illustrating that when a country produces more units of one
type of good (consumer goods), it has to sacrifice some units of the other good (capital goods)
e.g. A → B (to produce 10 more units of consumer goods, 2 units of capital goods must be
given up). This is because when a country is producing on the PPC, it is already fully utilising
all available resources and the current technology available. Assuming there are only 2 uses
of the resource (i.e., produce consumer good or capital good), producing more consumer
goods will incur an opportunity cost of the net benefit forgone from the next best alternative,
which is producing more capital goods.

Productive efficiency

Productive efficiency is a situation in which the economy cannot produce any more of one
good without sacrificing the production of another good.

When a country is producing a combination on the PPC, it is producing the highest possible
level of output given its resources and technology. Thus, it must sacrifice one good to obtain
more units of another good, and is in a state of productive efficiency.

In contrast, if a country is producing a combination that is inside the PPC (e.g. point X), there
is wastage of resources and the country is in a state of productive inefficiency. There is
either

1) inefficient use of resources (underemployment – resources are engaged in production,

but they are operating below potential) and / or

2) failure to use all resources (unemployment – some resources are not used at all for
production)

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 Thus, the PPC illustrates:

Scarcity - the unattainable combinations beyond the PPC

Choice - the need to choose among alternative combinations along the PPC.
Opportunity cost - the negative slope of the PPC reflects trade-offs. The opportunity cost
is the forgone net benefit from the trade-off (next best alternative).
Productive efficiency – all points on the PPC.

Additional Info: Increasing opportunity cost

A country’s PPC is typically concave to the origin, i.e., the PPC becomes steeper and
steeper as the production of consumer goods rises. This shape of the PPC reflects
increasing trade-offs, i.e., in order to get an equal additional amount of one good, society
must sacrifice an ever-increasing amount of another good. The increasing trade-offs also
means a larger opportunity cost is incurred.

Table 2: Trade-off from producing 10 additional units of consumer goods

Ref. points Trade-off from producing additional 10 units of consumer goods
(in terms of units of capital goods forgone)
A→B 2
B→C 3
C→D 5
D→E 7
E→F 10
F→G 23

Q: Why does the trade-off & opportunity cost increase when more of one good is
produced?

A: Resources are not equally suited for producing different goods.

For example, as an economy increases the production of consumer goods, e.g., 10 units of
agricultural goods, eventually it has to use resources (e.g., land) that are less suitable for
producing agricultural goods (but are better suited for producing capital goods e.g.,
factories). This means that increasingly more resources must be used to produce additional
equal amounts (i.e. 10 units) of agricultural goods. Consequently, an increasing number of
units of capital goods is given up to obtain an additional equal amount of agricultural goods
(larger trade-off), leading to a larger opportunity cost being incurred (the forgone net benefit
from having those units of capital goods).

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3.3 Shifting of the PPC
The PPC of an economy is drawn for a given quantity of resources and level of technology.
When there are changes in resources or technology, there would be a shift of the PPC.

An outward shift of the PPC indicates an increase in the productive capacity of the economy
(maximum possible output that can be produced by the economy). With reference to Diagram
2, the shift from PPC2020 to PPC2024 indicates that the economy is now capable of producing a
greater combination of goods than before.

Diagram 2: Outward Shift of the PPC

Capital
Goods
(units) 60
PPC2020

50

PPC2024

0 Consumer Goods
60 70 (units)
What may cause the PPC to shift outward?

1) Increase in the quantity of available resources

Examples:
● Land - discovery of new mining grounds, fishing grounds, etc.
● Labour - population growth, inflow of foreign workers, etc.
● Capital - increased investment in factories, machinery, infrastructure like transport
and telecommunications networks.
● Entrepreneurs - rise in the number of entrepreneurs.

2) Improvement in the quality (productivity) of the available resources.

The productivity of a factor input is the output per unit of the factor input. If the quantity
of resources is the same but each unit of resource has become more productive, the
country’s ability to produce increases, causing an outward shift of the PPC.

Examples:
● Land productivity can be improved through improved techniques of production
- Improved irrigation systems
- improved techniques of production (fertilisers) / extraction (for mining)
● Capital productivity can be improved by advancement in technology
- Improved machinery as a result of R&D
● Labour productivity can be improved through
- Increasing the education and/or skill level of the workforce by investing in
human capital. Reason: A more educated and/or skilled labour force is more able
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 to make use of the latest machinery or method of production which can enhance
labour productivity.

THINK!
What can Singapore do to shift its PPC outwards?

Relax immigration laws / issue more work permits to allow the entry of more foreign workers,
technology, capital goods, encourage entrepreneurship, adoption of technology and capital
equipment, invest in education and skills training policies, R&D, pro-creation policies

Consequence of Investment-Consumption Choice

Capital and Consumer goods

Capital goods are man-made goods which are used to produce other goods. They are not
meant for immediate consumption. Examples include factories, machinery, tools, equipment,
and various buildings which are used to produce other products for consumption.

Consumer goods are goods for final consumption, ready for use as they are. Examples
include hawker food and clothing.

THINK!
The same good can sometimes be capital or consumer goods for different economic
agents. Can you think of a few such examples?

A car used by the individual to drive to work or ferry family members or for pleasure is a
consumer good but used as a taxi or delivery vehicle by a firm is part of a production process
and thus a capital good.
A shirt bought by the individual is a consumer good but is a capital good (part of inventory)
for a fashion retailer.

Why does the economy’s Investment-Consumption choice matter?

A country’s total final output is made up of capital and consumer goods. Faced with scarcity
of resources, all economies have to make a choice on the combination of capital and
consumer goods to produce. Choosing to produce more capital goods requires a trade-off in
terms of forgoing the production of some consumer goods and vice versa.

Investment is the production of capital goods in a certain time period. The more investment
a country undertakes, i.e., the more capital goods it produces, and the greater the
productive capacity of the country in the following time period, since capital goods are
used to produce other goods. Hence if a country chooses to produce more capital goods rather
than consumer goods, it will be able to enjoy more consumer goods in the future.

With reference to Diagram 3, when the country chooses to move from combination b to a,
where A has more capital but less consumer goods, the benefit is that it would experience a
greater outward shift of the PPC in the future (i.e. a higher rate of potential economic growth).
However, the trade-off is the consumer goods sacrificed which means less needs and wants
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are satisfied in the current period. An opportunity cost is thus incurred in the form of net
benefit from the consumer goods sacrificed.

Ceteris paribus, the higher the level of investment, the greater the rate of economic
growth (and the greater the expansion in productive capacity of the economy i.e.
outward shift in PPC, over time).

Diagram 3:
Capital PPCB in the future if point b was
Goods chosen in the present period
(units)

PPC
a
A PPCA in the future if point a
was chosen in the present
period
b
B
c
C

0 Consumer Goods
(units)

Capital consumption (or capital depreciation) refers to the reduction in the value of capital
goods over a one-year period due to physical wear and tear, and due to capital becoming
obsolete.

The above example assumes that the country faces the rate of capital consumption, 0C, and
this would be more than offset by the amount of capital goods the country produces if it were
at points a or b. Hence, if 0A or 0B amounts of capital goods were produced, this would mean
that there will be an increase in the total quantity of capital goods in the economy, since capital
consumption is only 0C units.

THINK!
Can a country’s PPC shift inwards over time?
Yes.
Causes:
1) Investment level is less than capital consumption (e.g. less than 0C in diagram 3) such
that the capital stock shrinks over time, reducing a country’s productive capacity.
2) War or natural disaster that destroys a part of the country’s capital stock and/or labour
and/or land resources.
3) Declining birth rates that result in a shrinkage of the labour force as older workers retire
(assuming labour productivity does not rise fast enough to offset this effect).

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3.4 Economic Objectives of Efficiency and Equity

These are 2 important concepts to remember for Microeconomics!

Confronted with the problem of scarcity of resources which have alternative uses, societies
aim to achieve the best use of resources. There are 2 criteria to determine whether resources
are being “best” utilised.

(1) Efficient use of resources

The optimal allocation of resources for society refers to a situation whereby the resources are
allocated in such a way that it would be impossible to improve the welfare of one or more
individuals without simultaneously reducing the welfare of another or others, i.e. society’s
welfare is maximised. Such an economy is said to be socially efficient or at Pareto optimality.

To achieve efficient use of resources in the current period, the following types of efficiency
must be achieved.

Productive Efficiency

This is a situation in which the economy could not produce any more of one good without
sacrificing production of another good.

This means the economy is producing the highest possible level of output given its resources
and technology. It requires

i) All firms to be producing at lowest possible average cost1

ii) All resources to be fully and efficiently employed

When an economy attains productive efficiency, it will be producing on the PPC. All points
on the PPC are productive efficient points.

Allocative Efficiency
This is a situation in which the economy is producing the combination of output most desired
or wanted by society. This means society’s welfare is maximised. It requires:

i) the economy to be producing on the PPC (i.e. there must be productive

efficiency); and

ii) the economy to choose the point on the PPC which maximises society’s
welfare in accordance with society's preferences.

Allocative efficiency is attained when every good or service is produced up to the point where
the last unit provides a marginal benefit to consumers that is equal to the marginal cost
of production. [You will learn more about this in Book 3.]

1
This concept will be visited again in the topic “Firms and Decisions”, which you will learn in JC2.
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 Note: Productive efficiency is a necessary but insufficient condition for allocative efficiency
i.e.
▪ To attain allocative efficiency, productive efficiency must already be achieved.

▪ When productive efficiency is achieved, it does not necessarily mean that there is
allocative efficiency, because the output may not be what people most desire.
(Productive efficiency ≠ allocative efficiency)

In terms of the PPC, all points on the PPC are productively efficient, but only one point that
will maximise the society's welfare (based on the people's preferences) is allocative
efficient.

THINK!

Guns

• A
(units) A

• B B

• C
• D
0 Butter (units)
Points A, B, C, and D are productively efficient since they are on the PPC as all resources are
fully employed to produce the maximum possible output.

If the country is at war, which point do you think society is likely to prefer when it comes to
allocating resources? Why?
A: Point A, as more guns are likely to be preferred to butter during wartime.

(2) Equitable Distribution of output (or Equity)

Connect: You will learn more about this in the topic ‘Inequity’ (Book 4).

Another criterion for assessing best use of resources is equity in distribution of output. This
is about the fairness of distribution of output. Equity is achieved when output is distributed in
a way that is considered to be fair or just. What is considered fair is based on society’s value
judgement.

The current output mix in an economy may be deemed allocative efficient (Pareto optimal) but
could be regarded as inequitable or unfair if some people are extremely rich while others are
extremely poor. For example, the richest 20% in the country may be able to consume 80% of
the country’s output, which may be deemed unfair.

Income inequality, which leads to inequitable output distribution, cannot be neglected. If not
alleviated, it can be a source of social discontent which can spell destruction for the economy.
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 PPC and Macroeconomic concepts
The PPC can also be used to illustrate the macroeconomics concepts of full
employment, unemployment and economic growth that will be covered later.

OVERVIEW OF THE CENTRAL ECONOMIC PROBLEM

Use PPC to
Unlimited illustrate
Human these key
Necessitates Gives rise
Wants concepts
to
Trade-offs &
Scarcity Choice Opportunity
Cost PPC outlines
Limited the maximum
Resources
Rational combination
Gives rise to
Decision- consequences of goods and
Making (both intended services an
Based on and economy can
Marginalist unintended)
Principle where
produce in a
objectives are time period,
maximised given that all
where MB=MC its resources
Bound by are used at a
Constraints,
Information, current level
Perspectives of technology

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Past A-Level Essay Questions
Note that understanding of concepts in later topics is required to fully attempt these questions, so it is
sufficient to read them for now to get a flavour of what essays can look like, then come back to them
later when you have a fuller understanding of Economics!

[2023/1]
The amount of goods and services that can be produced in an economy is insufficient to satisfy the
wants of its population. This leads to the economic consequences of scarcity and choice.

(a) Explain how a production possibility curve can be used to show the concepts of underutilisation of
economic resources and opportunity cost. [10]
(b) Discuss whether it is possible to increase the total production of goods and services in an economy
without resulting in environmental damage or other unintended consequences. [15]

[2021/1]
The market for bicycles is often said to generate external benefits such as reduced traffic congestion
and reduced air pollution.
(a) Explain how economic theory suggests consumers act rationally to decide whether or not to buy a
bicycle, and how producers of bicycles act rationally to determine their level of output. [10]
(b) Discuss how government intervention in the market for bicycles could be used to maximise social
welfare and consider how likely it is that such intervention will be successful in achieving this aim.
[15]

[2018/3]
The proposed Cross Island MRT line would run through the Central Catchment Nature Reserve. An
alternative route going round the reserve’s southern edge would preserve Singapore’s natural heritage
and serve a much larger number of residents. The Land Transport Authority, LTA says that the
alternative route would entail longer travelling time, higher costs, more land acquisition and possibly
bigger engineering challenges.
(a) Explain what needs to be considered when a government makes rational spending decisions about
such projects. [10]
(b) Discuss whether the government should proceed with the proposed alternative route for the Cross
Island MRT. [15]

[2015/1]
Prospective students and governments each make decisions that affect the scarce resources that are
devoted to university education.
(a) Explain the determinants of a rational prospective students’ decision on whether to participate in
university education. [10]
(b) Discuss the factors that governments should consider in allocating resources to university
education. [15]

[2014/1]
In order for specialisation to be beneficial, it must be accompanied by exchange.
(a) Explain how benefits to the economy can arise from specialisation and exchange. [10]
Note: Use the concept of opportunity cost to explain why specialisation and trade can be beneficial.

[2013/1]
Economics assumes rational decision-making by consumers, firms and government.
(a) Explain what is involved in rational decision-making both by consumers and by firms. [10]
(b) Discuss whether rational decision-making by consumers, firms and government always leads to an
efficient allocation of resources. [15]

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 Victoria Junior College
2025 JC1 H2 Economics
The Central Economic Problem – Tutorial Worksheet

Section A: Review and Application [1 - 1.5 tutorial]

Question 1

Table 1: John’s total and marginal utility of consuming chocolate bars

Quantity of Marginal Utility
Total Utility (cents)
chocolate bars (cents)
1 90
2 160
3 215
4 200
5 180

(a) Calculate John’s marginal utility of eating chocolate bars by filling in the last column
in the above table.

(b) Assuming that John is rational and the price of one chocolate bar is 60 cents, how
many bars of chocolate would he consume? Justify your answer.

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Question 2
(Adapted from 2023 A-Level Essay Question 1)

Note to students:

This is an initial flavour of what part of an Economics essay question looks like

An essay comprises two parts – part (a) is a 10-mark “Explain”-type question, while part (b)
is a 15-mark “Discuss”-type question that requires some value judgement (i.e. making a
stand), based on certain criteria. We are only looking at a part (a) question today.

Let’s break it down together!

The amount of goods and services that can be produced in an economy is insufficient
to satisfy the wants of its population. This leads to the economic consequences of
scarcity and choice.

Explain how a production possibility curve can be used to show the concepts of
underutilisation of economic resources and opportunity cost. [10]

STEP 1
Each question part has two requirements. Based on the phrasing of the question,
what do you think are the two requirements of this part (a) essay?

Guidance: What are the two main concepts I need to explain here, using the PPC?

R1: R2:

STEP 2A
Now, let’s look at the two requirements individually, and see how we can explain
them.

For now, let’s focus on the conceptual explanations and making sure that we are all
on the same page with regard to the PPC!

R1:

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 STEP 2B
R2:

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Question 3

(a) Explain one possible cause that can lead to the PPC shifting outwards i.e. increase
in productive capacity.

(b) With the aid of a diagram, explain how an ageing population might affect
Singapore’s productive capacity.

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Section B: Case Study Question [1 tutorial]

Read the extract given and use the information given in the extracts to answer the
questions.

Extract 1: Buy local but at what price? Costlier Singapore produce could hamper quest
for greater food security

In 2019, the then Ministry of Environment and Water Resources announced the Scan data
“30 by 30” initiative, to produce 30 per cent of the nation’s nutritional needs locally and
questions
by 2030. This is to strengthen Singapore's food security which has become even
Read the
more pressing, in light of climate change and extreme weather events, geopolitical questions
tensions, and disease outbreaks which have impacted food production and supply and see if
chains. The government has been supporting the local food industry to boost its there are
capabilities and capacity through various incentives and grants for food producers any pieces
to adopt innovative farming technologies or carry out research and development. of evidence
that can be
However, the government needs to be judicious in her use of funds, as this means used to
that there will be less available for the expansion of digital communications support
facilities. your
answers
Issue:
The issue of supporting local produce and its higher costs is back in the spotlight Food
after Minister for Sustainability and the Environment Grace Fu spoke about it in scarcity
Parliament in April. Ms Fu called for more support in buying local, even if they cost
more than imported produce.

While the price difference between local and imported produce varies according to
the food category, a survey found that local produce can cost about 83 per cent
more than imported ones.

Despite the price difference, Ms Doreen Chan still believes she is getting more
bang for her buck by buying local, as they are “fresher” and “better in quality”.

"I get local eggs, like Seng Choon eggs, which I find to be fresher than imported
eggs. They’re more expensive, by a dollar or so, but the quality of local produce is
so much better.” said the 76-year-old, who works in the healing services industry.

Ms Chan is one of the few who are undeterred by the generally higher prices of
local produce, based on TODAY’s interviews with 10 consumers. For most of them,
the price difference caused by high local production costs is significant enough to
make supporting local products difficult.

One of them is 20-year-old student, Ms Clarissa Lim, who said: “I always look out
for prices when buying produce, and the higher cost of local produce definitely
deters me from buying them. Money is tight these days because of rising inflation,
so it’s important that I save the extra bit of money.”

Another consumer, Ms Afifah Shameemah, supports the idea of buying local, but
in practice she would opt for whichever produce that is “value for money”.
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 “I don’t really have a preference or aversion to local produce. I just go for whatever
that is cheaper, and if it happens to be sourced from local farms, then great,” the
24-year-old undergraduate said.

Source: Today, 12 June 2023

(a) Using the Marginalist Principle, explain how grocery shoppers make rational
decisions on how much local produce to purchase. [6]

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 (b) “The government has been supporting the local food industry to boost its
capabilities and capacity through various incentives and grants for food producers
to adopt innovative farming technologies or carry out research and development.”

Explain the opportunity cost of the 30-by-30 plan. [2]

(c) Using the PPC diagram, explain a possible impact of Singapore’s 30-by-30 policy
on Singapore’s productive capacity. [4]

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Key Learning Points

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