1.2 How do economists approach the world?

The question describes a wealthy country that still cannot satisfy all its desired uses of resources simultaneously. The key detail is that trade-offs exist despite high income and productivity.

Scarcity arises when unlimited wants exceed limited resources, regardless of the absolute level of wealth. Even a rich nation has finite land, labour, capital, and time relative to all the things its citizens and government desire.

Poverty refers to a low absolute level of income or resources relative to others — the Nordic country is explicitly described as thriving, so poverty does not apply. A shortage is a temporary market imbalance, not a structural condition. Inefficiency is about waste in production, not about the fundamental mismatch between wants and resources.

The scenario perfectly illustrates scarcity: wants (healthcare, education, defence spending) exceed available resources (the fixed budget), forcing trade-offs. This is true for every economy, rich or poor.

The question asks which economic concept explains why even a wealthy nation must make trade-offs when allocating its government budget across competing priorities.

'Poverty, because even rich nations lack sufficient resources to meet basic needs' is incorrect — the country is explicitly described as thriving, with high output per person. Poverty describes low absolute resources, not the universal condition of wants exceeding resources.

'A shortage, because the government cannot temporarily supply enough public services' is incorrect — a shortage is a temporary, price-related market imbalance (quantity demanded exceeds quantity supplied at the current price), not the permanent structural condition described here.

'Inefficiency, because a well-run economy should be able to fund all public priorities simultaneously' is incorrect — no level of efficiency can eliminate scarcity, because wants are unlimited and resources are always finite, making trade-offs unavoidable regardless of how well resources are used.

The remaining option — scarcity — is correct. It is the universal condition that forces trade-offs in every economy, whether rich or poor, by ensuring that wants always exceed available resources.

Statement 1 makes a predictive claim: 'a 5 pp tax rise will reduce consumer spending by 3%.' This is a factual prediction about cause and effect. Statement 2 makes a recommendation: the tax rate 'should be raised' — expressing what the speaker believes ought to happen based on a value judgement about inequality.

A positive statement describes what is, was, or will be — it is objective and testable against data. A normative statement prescribes what ought to be — it is based on values and cannot be proven true or false empirically. Statement 1 can in principle be tested by examining spending data after a tax change; Statement 2 cannot be settled by data alone because it depends on how much weight one places on reducing inequality versus other goals.

Statement 1 = positive (objective, testable prediction). Statement 2 = normative (value judgement signalled by the word 'should' and the ethical goal of reducing inequality).

The correct classification is: Statement 1 is positive; Statement 2 is normative. The fact that both involve income tax does not make them the same type — the distinction depends on whether the claim is testable (positive) or value-based (normative).

The question tests the ability to distinguish positive statements (testable factual claims) from normative statements (value-based prescriptions), using two specific statements about income tax policy.

'Statement 1 is normative; Statement 2 is positive' reverses the correct classification. Statement 1 predicts a factual outcome and is testable with spending data — this is positive economics. Statement 2 uses the word 'should' and rests on a value judgement about inequality — this is normative.

'Both statements are positive because both involve income tax' is incorrect — the subject matter (tax) does not determine the type. Statement 2 contains a value-based prescription ('should be raised to reduce inequality'), which makes it normative regardless of its topic.

'Both statements are normative because both are about government policy' is incorrect — government policy statements can be either positive or normative. Statement 1 is a testable empirical prediction and is therefore positive, not normative.

The correct answer is: Statement 1 is positive; Statement 2 is normative. The key signals are testability (Statement 1 can be checked against data) and the word 'should' combined with a value judgement (Statement 2 cannot be settled by evidence alone).