AQA A-level Economics: Methodology, scarcity, resources and PPDs (7136)

This guide follows the AQA AS and A-level Economics specification (version 1.3, 29 June 2022) for the A-level, first taught from September 2015. It covers the sub-section called Economic methodology and the economic problem, numbered 3.1.1 on the AQA website (the combined specification PDF prints the A-level version as 4.1.1). Its five parts, 3.1.1.1 to 3.1.1.5, are taught below in order. Every number in the worked examples is invented, for illustration only.

Read alongside the revision notes and try the practice questions. For the wider microeconomics context, see the overview of this part of the course, the course hub is AQA A-level Economics, and the printable checklist records progress. To spot weak areas before you start, try the free 10-minute diagnostics.

Outcomes at a glance

Section	Outcome
3.1.1.1 Economic methodology	Explain economics as a social science, how its methods are like and unlike those of natural and other sciences, positive versus normative statements, how value judgements shape decisions and policy, and how views on the best option depend on positive consequences and on moral and political judgements
3.1.1.2 Nature and purpose of economic activity	Production of goods and services to satisfy needs and wants; the decisions of what, how and for whom
3.1.1.3 Economic resources	Land, labour, capital and enterprise as factors of production; the environment as a scarce resource
3.1.1.4 Scarcity, choice and allocation	Scarcity from limited resources and unlimited wants; choices between uses; opportunity cost
3.1.1.5 Production possibility diagrams	Use them to show resource allocation, opportunity cost and trade-offs, unemployed resources and growth; explain why every boundary point is productively efficient but not every one is allocatively efficient

3.1.1.1 Economic methodology

Economics is a social science: the study of how households, firms and governments behave when resources are scarce. It builds models, derives hypotheses from them and tests those against evidence, as natural sciences do. The specification asks how thinking as an economist may differ from other scientific enquiry.

Similarities with natural sciences

• Both simplify reality into models and state assumptions.
• Both form hypotheses that evidence can support or contradict.
• Both use ceteris paribus (all else equal) to isolate one cause.

Differences

• The subject matter is human behaviour, which responds to incentives, expectations and the theory itself. Atoms do not.
• Controlled laboratory experiments are rarely possible. Economists often rely on past data, where many variables move together, so separating cause from effect is hard.
• Assumptions such as rational behaviour are approximations, and people sometimes act differently.
• Results are tendencies, not exact laws, and value judgements enter more directly because findings are used to recommend policy.

Positive and normative statements

A positive statement can in principle be tested against evidence, and may be right or wrong. A normative statement contains a value judgement about what ought to be, so evidence alone cannot settle it.

Illustrative statement	Type	Reason
Bus passenger numbers in Country B fell by 3% after fares rose by 5%.	Positive	Checkable against data
Bus fares in Country B should be frozen.	Normative	“Should”
A tax on sugary drinks will reduce consumption.	Positive	Testable, even if false
Inequality in Country B is unfairly high.	Normative	“Unfairly”
Unemployment is too high, so interest rates should fall.	Both	A judgement plus a policy recommendation

A positive statement is not always true: it only has to be testable. Look for words such as “should”, “unfair” and “too high”, and ask whether data could settle the claim.

Value judgements in decisions and policy

A value judgement is a personal view of what is good or bad. Value judgements influence which problems get studied, which objectives a government chases and which trade-offs it accepts. Views on the best option rest on two things.

1. Positive consequences: what a decision is predicted to do.
2. Moral and political judgements: how fairness, freedom and the role of the state are weighed.

Worked example (illustrative). Country B adds a tax of 0.5 currency units per bottle to a product. Consumption falls from 500,000 to 440,000 bottles, and revenue is 440,000 × 0.5 = 220,000 units. The fall is (500,000 − 440,000) ÷ 500,000 = 12%. Those are positive findings. Two people can accept every figure and still disagree. One judges that a 12% fall justifies the tax. The other judges that it hits low-income households hardest and limits freedom of choice. The disagreement is about values, not facts, and your answer should say so.

3.1.1.2 The nature and purpose of economic activity

The central purpose of economic activity is the production of goods and services to satisfy needs and wants. Needs are what people require to survive, such as food, water and shelter. Wants are goods and services people desire beyond that. The line is not fixed: a phone may be a want for one person and a work necessity for another.

Every economy must decide:

• What to produce: more food or more machinery, more health care or more defence.
• How to produce: which techniques and what mix of labour and capital.
• For whom: how output is shared among households.

Worked example: how to produce (illustrative). A bakery needs 600 loaves a day. Labour costs 100 currency units per worker per day, and an oven costs 150 per day.

Method	Inputs	Daily cost	Cost per loaf
Labour-intensive	6 workers, 1 oven	600 + 150 = 750	1.25
Capital-intensive	2 workers, 3 ovens	200 + 450 = 650	1.08

The capital-intensive method is cheaper. If the wage doubles to 200, costs become 1,350 (2.25 per loaf) and 850 (1.42 per loaf), so the gap widens. The choice of “how” responds to the relative price of inputs, which is why it is an economic decision, not just a technical one.

3.1.1.3 Economic resources

Resources are the inputs used to produce goods and services, called the factors of production.

Factor	Meaning	Examples	Reward
Land	Natural resources	Farmland, minerals, water	Rent
Labour	Human effort and skill	Workers, teachers	Wages
Capital	Man-made goods used to produce others	Machines, roads, factories	Interest
Enterprise	Organising the others and bearing risk	Entrepreneurs	Profit

Capital here is physical, not money. Enterprise combines the other three and bears the risk.

The environment is a scarce resource. Clean air, water, forests and a stable climate are limited. Some resources are non-renewable and cannot be replaced once used. Others are renewable but can be used faster than they regenerate. The environment also absorbs waste, and that capacity is limited. Treating it as free leads to over-use, because using it for one purpose gives up other uses, including its value to future generations.

3.1.1.4 Scarcity, choice and the allocation of resources

The fundamental economic problem is scarcity. It results from limited resources and unlimited wants. Because resources are finite, not every want can be met. Scarcity means that choices must be made about how resources are allocated between different uses. Rich economies face scarcity too.

Choosing one use of resources always carries an opportunity cost: the best alternative you did not pick. It is not the total of all alternatives.

Worked example (illustrative). A farmer has 20 hectares. A hectare earns net revenue of 900 currency units from wheat, 700 from barley and 650 from sheep grazing.

• Opportunity cost of one hectare of wheat is 700, the barley forgone (not 700 + 650).
• All 20 hectares in wheat earn 20 × 900 = 18,000. The opportunity cost is 20 × 700 = 14,000, so the gain over the next best use is 4,000.

The same idea applies to a student who gives up 8 hours of paid work at 12 units an hour to revise (96 units forgone).

3.1.1.5 Production possibility diagrams

A production possibility diagram (PPD) shows the maximum combinations of two types of goods an economy can produce in a period, using all its resources fully and efficiently. Put capital goods (K) on the horizontal axis and consumer goods (C) on the vertical axis. The curve is the production possibility boundary.

Illustrative table for Country A (thousands of units a year):

Point	Capital goods K	Consumer goods C
a	0	100
b	28	96
c	60	80
d	80	60
e	96	28
f	100	0

C
100 a
 96  b
 80      c
 60           d
 28                 e
  0 ---------------------f--- K
    0   28  60  80  96 100

The boundary bows outward from the origin. Points on it are attainable and use all resources. Points beyond it are unattainable now. Points inside it are attainable but leave resources idle or misused.

Opportunity cost and trade-offs

Moving along the boundary reallocates resources between the two uses, so gaining one good costs some of the other. The opportunity cost of each extra unit of K is the C given up.

Move	K gained	C lost	Opportunity cost of 1 K
a to b	28	4	4 ÷ 28 = 0.14
b to c	32	16	16 ÷ 32 = 0.5
c to d	20	20	1
d to e	16	32	2
e to f	4	28	7

The rise happens because the resources fit the two uses unequally. The first resources moved are the best at making K. Later, resources good at making C must be moved. The outward-bowed shape shows increasing opportunity cost; a straight line would mean constant cost.

A trade-off exists between present and future. Choosing d (more K) over c gives up 20 units of C now, but more capital can raise future output. Suppose, as an invented assumption, that K of 60 raises the boundary by 4% and K of 80 by 8%. Then the maximum C next period is 100 × 1.04 = 104 or 100 × 1.08 = 108.

Unemployed resources

A point inside the boundary, such as u at K = 48, C = 60 (check: 48² + 60² = 5,904, below 10,000), shows unemployed or inefficiently used resources. Moving to the boundary gives a gain with no opportunity cost. From u to c adds 12 K and 20 C. From u to d adds 32 K and no loss of C.

Economic growth

Growth is shown in two ways.

• Actual growth: moving from inside the boundary towards it, as above.
• Potential growth: the boundary shifts outward because of more or better resources (labour, capital, land, enterprise) or better technology.

Suppose the boundary becomes K² + C² = 12,100. Then point c at (60, 80) becomes (66, 88): a 10% rise in each good. If technology improved only in consumer goods, the C intercept would rise (say from 100 to 120, which is 20%) and the K intercept would stay at 100.

Efficiency on the boundary

• Productive efficiency: resources are used fully and at lowest cost, so more of one good is possible only by producing less of the other. Every boundary point is productively efficient. Points inside are not.
• Allocative efficiency: output matches what society values most, where the benefit from the last unit equals its cost. Only one boundary point usually has this property. The diagram alone cannot show which, because that depends on preferences (value judgements). Points c and d are both productively efficient, but society may prefer one.

Common errors

• Calling any statement with a number “positive” regardless of “should”.
• Defining opportunity cost as the sum of all alternatives forgone, or as money cost only.
• Treating capital as money instead of man-made production goods.
• Labelling a point inside the boundary as efficient.
• Saying the boundary shifts because of a movement along it.
• Claiming that all boundary points are allocatively efficient.
• Writing “scarcity means shortage” when it is a permanent condition.

Official syllabus

AQA AS and A-level Economics specification, version 1.3 (29 June 2022), published by AQA. The content is the A-level sub-section Economic methodology and the economic problem (3.1.1 on the AQA website, 4.1.1 in the combined PDF).