OCR A Level Economics: Scarcity, choice, the margin and the market economy (H460) – Revision Notes

These notes condense the area of study Scarcity and choice in Component 1, Microeconomics, of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021: the basic economic problem, the market economy and the concept of the margin. Explanations and longer worked examples are in the study guide. Test yourself with the practice set, see the OCR Economics hub and tick off the checklist. Unsure where to start? Try the free diagnostics. Every figure below is invented.

Key definitions

Term	Definition to learn
Economic good	A good or service that uses scarce resources to supply, so it has a cost of provision
Free good	A good that needs no resources to supply, so it has no price
Need	Something required to survive or avoid serious harm
Want	Something desired beyond a need; wants are unlimited
Scarcity	Unlimited wants set against limited resources
Basic economic problem	Scarcity forces choice over what to make, how to make it and who gets it
Positive statement	Describes or predicts; evidence can check it
Normative statement	Expresses an opinion on what ought to happen
Sustainability	Using resources to satisfy today’s needs in a way that leaves future generations able to satisfy their own
Margin	The point of deciding on one more or one less unit
Rationality	Acting consistently to maximise a goal using available information

The basic economic problem

Chain to write: wants unlimited, resources limited, so scarcity, so choice, so some way of settling what is made, how and for whom.

Implications to evaluate:

• Every decision involves giving something up.
• A mechanism for choosing is always needed, and every mechanism has costs.
• The problem is permanent: growth raises output but wants rise too.
• Severity varies with resources, technology and the quality of choices.
• Rich economies face scarcity as well as poor ones.

Use an example for each agent: a household choosing between rent and savings, a firm choosing between a new machine and extra staff, a government choosing between health and education spending.

Positive or normative: the quick test

1. Could you check it against evidence? If yes, it is positive, even if it is false.
2. Does it say “should”, “fair”, “too much” or “better”? Probably normative.
3. A mixed statement has both parts: split it and label each.

Examples: “Unemployment in Country A rose to 7%” is positive. “A 7% rate is unacceptable” is normative.

Agents and factors of production

Agent	Role
Households	Supply factors (mainly labour), consume, save, pay taxes
Firms	Combine factors to produce, employ labour, pay for resources, pay taxes
Government	Provides goods and services, taxes, regulates, redistributes, employs, buys

Factor	What it is	Reward
Land	All natural resources	Rent
Labour	Human effort and skill	Wages and salaries
Capital	Man-made goods that produce other goods	Interest
Enterprise	Coordinating the other factors and taking the risk	Profit

Method for factor shares. Find value added (revenue minus bought-in materials). Profit is what remains after the other rewards. Each share = reward ÷ value added × 100.

Worked reminder (invented). A small farm pays £45,000 in wages out of £120,000 total factor payments. Wages share = 45,000 ÷ 120,000 × 100 = 37.5%.

Sustainability

Method in steps:

1. Work out growth or renewal for the year (stock × rate).
2. Stock after the year = stock + growth − amount taken.
3. If stock falls, the use is not sustainable.
4. A sustainable use equals renewal.

Reminder (invented): a stock of 3,000 units grows 5% a year and 200 are taken. Growth = 150, so the stock ends at 3,000 + 150 − 200 = 2,950. Taking 150 would keep it level.

Effects to explain: resource depletion raises scarcity and prices, forces substitution and may lead to quotas; sustainable methods ease scarcity in the long run but cost something now. Evaluate by who pays today and who benefits later.

The market economy

Strengths	Weaknesses
Prices signal and ration, so resources move to where demand is	Externalities and missing markets, so over- or under-provision
Consumer choice steers production	Inequality of income and wealth
Profit and reward motivate efficiency and innovation	Market power and restricted competition
Decentralised use of information	Instability and short-term outlook

Role of government. Provide a legal framework and property rights; supply goods the market does not; tax, subsidise or regulate to correct failure; promote competition; redistribute; stabilise.

Evaluation checklist. Government failure (poor information, political pressure, unintended consequences, cost); the size of the market failure; time lags; value judgements about fairness; context. Finish with a reasoned judgement, not a list.

The margin

Formula. Marginal value = change in total ÷ change in quantity.

• Marginal cost (MC) = change in total cost for one more unit. Fixed cost does not change, so it never appears in MC.
• Marginal revenue (MR) = change in total revenue for one more unit.
• Marginal utility (MU) = change in total utility for one more unit; it tends to fall (diminishing MU).
• Marginal product (MP) = change in total output from one more worker.

Decision rule. Do one more while marginal benefit is at least marginal cost. Stop when marginal cost exceeds marginal benefit.

Worked reminder (invented). A pottery’s output for 0 to 5 workers is 0, 8, 20, 29, 34, 36.

• MP: 8, 12, 9, 5, 2.
• Each unit sells for £12, so the extra output is worth £96, £144, £108, £60 and £24.
• A worker costs £90 a day. Workers 1 to 3 add value above £90; worker 4 adds £60. The pottery hires 3.

Usefulness of the margin. For: it fits small adjustments, ignores sunk costs, and underlies supply and demand. Against: data are hard to get, some choices are all-or-nothing, and benefits like satisfaction or environmental damage are hard to value. Judgement: strong for guiding choices that can be varied by degrees, weaker as a picture of how people actually decide.

Evaluating rationality. For: simple, predicts well for many firm decisions. Against: limited information, habit, copying others, concern for fairness, poor judgement under pressure. Judgement: a useful starting model, with accuracy varying by agent and situation.

Building an evaluation paragraph

Use the same four moves for the market economy, government, the margin and rationality.

1. Make a point and support it with a chain of reasoning.
2. Set out the counter-point that qualifies it.
3. Say what the answer depends on, such as the size of the failure, the time period, the information available or a value judgement.
4. Finish with a judgement that picks a side for a stated reason.

Must-know distinctions

• Free good (no resources used) versus a good that is free at the point of use (economic good, paid for by taxes).
• Need versus want: the line depends on time and place.
• Scarcity versus rarity.
• Positive (testable) versus normative (a value judgement).
• Marginal versus total (or average) values.
• Capital (man-made goods) versus money.
• Government intervention versus government failure.

Quick self-test

1. Define scarcity.
2. Distinguish an economic good from a free good.
3. Classify: “Rent controls cause housing shortages” and “Landlords ought to be taxed more”.
4. Name the factor of production and its reward for each of the following: a vineyard’s soil, a lorry, a manager who takes the risk of starting a firm.
5. A firm’s total cost is £250 at 10 units and £262 at 11 units. Find the marginal cost of the 11th unit.
6. Total utility is 55 for 3 units and 70 for 4. Find the marginal utility of the 4th.
7. Using the pottery figures above, how many workers are hired if the wage rises to £110?
8. A stock of 3,000 units grows 5% a year and 200 units are taken. What is the stock after one year?
9. Give one reason why fixed cost is excluded from marginal cost.
10. State one limitation of the rationality assumption.

Answers

1. The gap between unlimited wants and limited resources.
2. An economic good uses scarce resources to supply and has a cost; a free good needs no resources and has no price.
3. First is positive (testable); second is normative (a value judgement).
4. Land, rent; capital, interest; enterprise, profit.
5. 262 − 250 = £12.
6. 70 − 55 = 15.
7. Worker 3 adds £108, below £110; worker 2 adds £144. So 2 workers.
8. 3,000 + 150 − 200 = 2,950 units.
9. It does not change when output changes by one unit.
10. Any one: limited information; habit; copying others; concern for fairness.

Where marks are usually lost

• Defining scarcity without linking unlimited wants to limited resources.
• Writing “free goods are those that cost nothing to the consumer”, which confuses free at the point of use with free of resource cost.
• Labelling a statement normative because it is wrong, or positive because it has a figure in it.
• Giving the reward for capital as profit, or treating capital as money.
• Using total or average figures when the question asks for the marginal one.
• Listing strengths and weaknesses of the market with no weighing and no link to the context given.
• Describing government intervention as simply good, without government failure.
• Evaluating rationality in general terms, with no example of an agent and a situation.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, Component 1 content, area of study Scarcity and choice.