The economic problem 

The fundamental economic problem arises from unlimited wants and needs and limited scarce resources, to fulfil these needs and wants.

Opportunity cost
This leads on from the problem of scarcity. Opportunity cost is the cost of forgoing the next best alternative. In a situation which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the 'cost' incurred by not enjoying the benefit that would be had by taking the second best choice available. 

The production possibility frontier and the problem of scarcity.
The PPF shows the various combinations of goods and services that can be produced, assuming that inputs into the production process are fully utilised, with no spare capacity. 
So what this diagram is showing at point A 15 units of goods are demanded and 22 services. However if the population require more services then the economy would produce 11 units of goods and increase services to 25.


At point A&B scarcity occurs. For any point inside the frontier, such as C, there is idle resources so this means that production can increase without diverting resources away from another use.
At point C, THERE IS NO OPPORTUNITY COST.

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Factors of Production
There are four factors of production
1. Land 
This does not just consist of land in the literal sense it also includes other natural resources.
2.Labour
Provides labour in return for wages and salary 
3. Capital
In microeconomics, capital consists of equipment used for the production of consumer goods. Physical capital consists of machinery, equipment, tools etc. You have Variable capital this is raw materials and inventories.
4. Enterprise 
Enterprise if the factor of production provided by Entrepreneurs. entrepreneurs provide answers to the basic economic problems: what to produce? how much to produce? who to produce for.

Two main ways in which resources are allocated
1) Market economies (or price mechanisms)
2) Command mechanism 

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The different types of Markets
Market economy 
A pure market economy is on whereby all goods and services are allocated to users via the market or price mechanism. In this case those who cannot pay will not receive any goods/services. 
A pure market economy does not exist. However a market economy exists where the price mechanism is the main allocative mechanism. The price mechanism directs scarce resources between competing users. 
Command economy 
The price mechanism does not exist and all goods and services that are produced and provided are decided by the planners. This would represent communism
Mixed economy 
In terms of allocative mechanisms, a mixed economy has a large non market sector which is provided by the state i.e the government and a large market sector. In the market sector prices and market mechanisms allocate scarce resources between competing users.