Consumers have unlimited wants, that is, that there is an innumerable number of goods or services that we, as consumers, want. Also, the resources that are used to produce these wants are limited, that is, the materials used to make the goods or services we want are limited, or scarce. So, consumers must choose between their wants, and decide which want has a higher preference to them. This is what the economic problem is about. The economic problem is the issue of trying to satisfy the unlimited wants of an individual or community using a limited amount of resources. The opportunity cost, however, deals with the want you forego to satisfy another want that has a higher preference to a consumer. For example, if someone had the choice between a car and a holiday and chose the car, the opportunity cost would be the holiday that they had foregone.
The issue of choice, the concept of opportunity cost and the economic problem can be described using the production possibility frontier. This shows the possible production of two goods using four simple assumptions: Only two goods are being produced - in this case cars and houses, The state of technology is constant, The quantity of resources available remains unchanged, and All resources are fully employed. ie. All the resources are being used to their capacity.
The following is an example of the production possibility curve using cars and houses as the two goods being produced.
A B C D E Houses 0 30 60 90 120 Cars 200 150 100 50 0 The concept of choice is clearly seen here in this production possibility curve, as it gives a choice of only two options, cars or houses, as there cannot be an unlimited supply of both, as there are limited resources.