Chapter 1
Introduction to economics: scarcity, choice, and opportunity cost
1.0 Introduction
A lot of statements have been said about economics as a subject. The following are some of the statements.
a. ‘Economics is the painful elaboration of the obvious.’
b. ‘Economics is everything we know in a language we don’t understand’
c. A Swedish contribution: "Economics is like red whine - you shouldn't smell it but drink it, but if you drink too much on one
occasion, there is a risk for dizziness"
This introductory chapter will define economics and discuss the central economic problem which is a problem of scarcity.
1.1 Defining economics
It is quite difficult to define economics as such. According to one standard definition, economics is concerned with the way in
which resources are allocated among alternative uses to satisfy human wants. Economics therefore can be defined as a social
science that studies how society allocates its scarce resources amongst competing alternatives.
From the above definition, economics is described as a 'social science'. 'Social' in that the subject matter is the human being.
'Science' because the approach used has much in common with that of the natural sciences because economics use scientific
methodologies in its formulation of policies.
1.2 Microeconomics and macroeconomics
It is customary to divide economics into two parts: microeconomics, and macroeconomics. Microeconomics deals with the
economic behaviour of individual units such as consumers, firms and households; while macroeconomics deals with the behaviour
of economic aggregates such as national income and the level of employment. In simple words, it is like in microeconomics, we
examine the trees not the forest while in macroeconomics we examine the forest and not the trees.
1.3 Positive and normative economics
Positive economics refers to that part of economic analysis based on established facts. Positive economics states ‘what is in
existence’ and hence it is descriptive. It seeks to explain real economic events. For example, it explains that if the price of a
normal good increase, the quantity demanded for that good decrease.
Normative economics refers to that part of economic analysis which deals with opinions or value judgments about what economic
events should be like. Normative economics goes beyond the descriptions of particular economic situations and pass judgment.
As a result, normative economics is prescriptive. An example of normative economics is welfare economics.
1.4 The basic economic problem
The science of economics centers upon two basic facts: first, human material wants are virtually unlimited, second, economic
resources are scarce. As a result, the economic problem is a problem of scarcity and can be described in terms of scarce
resources in relation to unlimited wants.
1.4.1 Scarce resources
Resources are the things or services used to produce goods or services which can be used to satisfy wants. Economic resources
may be classified as property resources - land and capital - or as human resources - labour and entrepreneurial ability. These
resources are limited in supply and yet society desires more of them than is available. Thus it can be said that resources are
1
, scarce because they are limited in supply. However scarcity is a relative concept. It relates to the extent of the people's wants
to their ability to satisfy those wants.
Table 1.1 Different types of resources
Type Description Reward
Land All gifts of nature Rent
Labour The physical and mental effort of people Wages
Capital All goods used to produce other goods Interest
Enterprise All managers and organisers Profit
These resources are scarce because they are limited in supply and yet society desires more of them than is available.
1.4.2 Unlimited wants
Material wants refer to the desires of consumers to obtain and use various goods and services which provide satisfaction.
Desire for material wants is insatiable. The ends of human beings are without end. The fulfillment of some of the wants on the
list seems to do little more than raise people's expectations of something even better.
There are three reasons why wants are virtually unlimited:
• Goods eventually wear out and need to be replaced.
• People get fed up with what they already own.
• New or improved products become available.
.
Fig 1.1 The basic economic problem visualisation
Scarce
resource
Unlimite
d wants
The economic problem of scarcity applies to every society whether rich or poor. Mckenna P.J (1958:2) writes in his book
Intermediate Economic Theory, "whatever the cause, we find ourselves in a situation of scarcity where we can not have all the
things we want, because the resources we have at any time are limited in supply while our wants appear to be unlimited.” As a
result, societies have to make choices. Economics can also be defined as the study of the ways in which choices are made.
1.5 Economic choices - The requirement of making a choice is a consequence of the problem of scarcity. Resources are limited in
supply relative to demand for goods and services produced from the available resources. As a result society and individuals
2
, should make choices. This can be referred to as ‘economising’ – making the little available best be used to satisfy our wants and
needs.
1.5.1 The basic economic problem of choice
The basic economic problem is universal. Any society (rich or poor) faces the problem of scarcity since resources are limited in
supply. No society can produce all the goods wanted by its people. Society has to decide which commodities to make. For
example, should we produce sugar cane or maize? We have to decide how to make these commodities. Do we employ more
capital or labour? Who is going to use the goods that are eventually made?
Societies must make difficult choices of: -
What to produce and in what quantities?
How to produce?
For whom to produce?
The way in which different societies answer these questions give rise to different economic systems. These fundamental
economic questions can best be examined using a production possibilities curve.
1.6 The production possibilities curve (PPC)
A production possibilities curve or frontier shows what the society could produce with its existing resources at any moment in
time. That is, the PPC shows the maximum output that a society can produce given its existing supplies of land, labour, capital
and technical knowledge. The PPC works on the society's technical knowledge because another society with greater technical
knowledge may be able to produce more given the same quantities of resources.
1.6.1 An example
Let’s assume the following sample conditions for our illustration: -
a) The society can only produce two types of goods, say consumer goods which are those goods which directly satisfy our
wants and capital goods which are those goods which satisfy out wants indirectly by permitting further production of
consumer goods.
b) The available supply of resources is fixed both in quality and quantity.
c) The level of technology is fixed, that is, technology does not change during the course of our analysis.
d) The economy is operating at full employment and is achieving full production.
e) It’s a closed economy, that is, there is no international trade.
With its limited supplies of resources, our society could produce varying combination of consumer and capital goods. The extreme
possibilities are that either all resources are devoted towards producing consumer goods or the resources are devoted to the production
of capital goods. These are unrealistic possibilities since the society can not survive on consumer nor capital goods alone and so, some
combination is essential.
3
, Table 1.2 The production possibilities table
Type of Product Production alternatives
A B C D E
Consumer Goods 0 4 7 9 10
Capital Goods 4 3 2 1 0
From the production possibilities table it can be concluded that economic resources are scarce hence the production of one type of
goods involves the sacrifice of another. This can be represented on a diagram as follows:
Fig 1.2 The production possibilities curve
PPF
5 .S
CAPITAL GOODS
4 A (Unattainable
3 B combination)
2 Idle resources C
1 R
D
0 2 4 6 8 10 12 CONSUMER GOODS
All points on the frontier (e.g. point C) show the maximum possible combined outputs of the two commodities. The society then must
choose the product-mix it desires: more consumer goods mean less capital goods, and vice versa.
It is possible to produce a combination inside the curve (e.g. point R) but this would mean that resources are underutilized, that is, not
fully employed. In such a case, it is possible to produce more of both goods by moving to a point on the boundary.
However, the limited supplies of resources make any combination of consumer and capital goods, lying outside the production possibilities
curve, such as point S, unattainable. Hence product-mix represented by point S will only be possible when the productive capacity
increase. Thus, the curve moves outwards.
1.6.2 Application: The PPC and the economic concepts of scarcity, choice and opportunity cost
A production possibility curve shows that maximum output that a society can produce with its existing resources at any moment in time.
It is often referred to as the 'transformation curve' because in moving from one alternative or product-mix to another, say, from point
B to point C, we are in effect transforming capital goods into consumer goods, by shifting resources from the production of the latter.
Assuming that the society is producing only two goods, consumer and capital goods using its available resources and level of technical
knowledge, its production possibilities can be represented by the following boundary.
4
Introduction to economics: scarcity, choice, and opportunity cost
1.0 Introduction
A lot of statements have been said about economics as a subject. The following are some of the statements.
a. ‘Economics is the painful elaboration of the obvious.’
b. ‘Economics is everything we know in a language we don’t understand’
c. A Swedish contribution: "Economics is like red whine - you shouldn't smell it but drink it, but if you drink too much on one
occasion, there is a risk for dizziness"
This introductory chapter will define economics and discuss the central economic problem which is a problem of scarcity.
1.1 Defining economics
It is quite difficult to define economics as such. According to one standard definition, economics is concerned with the way in
which resources are allocated among alternative uses to satisfy human wants. Economics therefore can be defined as a social
science that studies how society allocates its scarce resources amongst competing alternatives.
From the above definition, economics is described as a 'social science'. 'Social' in that the subject matter is the human being.
'Science' because the approach used has much in common with that of the natural sciences because economics use scientific
methodologies in its formulation of policies.
1.2 Microeconomics and macroeconomics
It is customary to divide economics into two parts: microeconomics, and macroeconomics. Microeconomics deals with the
economic behaviour of individual units such as consumers, firms and households; while macroeconomics deals with the behaviour
of economic aggregates such as national income and the level of employment. In simple words, it is like in microeconomics, we
examine the trees not the forest while in macroeconomics we examine the forest and not the trees.
1.3 Positive and normative economics
Positive economics refers to that part of economic analysis based on established facts. Positive economics states ‘what is in
existence’ and hence it is descriptive. It seeks to explain real economic events. For example, it explains that if the price of a
normal good increase, the quantity demanded for that good decrease.
Normative economics refers to that part of economic analysis which deals with opinions or value judgments about what economic
events should be like. Normative economics goes beyond the descriptions of particular economic situations and pass judgment.
As a result, normative economics is prescriptive. An example of normative economics is welfare economics.
1.4 The basic economic problem
The science of economics centers upon two basic facts: first, human material wants are virtually unlimited, second, economic
resources are scarce. As a result, the economic problem is a problem of scarcity and can be described in terms of scarce
resources in relation to unlimited wants.
1.4.1 Scarce resources
Resources are the things or services used to produce goods or services which can be used to satisfy wants. Economic resources
may be classified as property resources - land and capital - or as human resources - labour and entrepreneurial ability. These
resources are limited in supply and yet society desires more of them than is available. Thus it can be said that resources are
1
, scarce because they are limited in supply. However scarcity is a relative concept. It relates to the extent of the people's wants
to their ability to satisfy those wants.
Table 1.1 Different types of resources
Type Description Reward
Land All gifts of nature Rent
Labour The physical and mental effort of people Wages
Capital All goods used to produce other goods Interest
Enterprise All managers and organisers Profit
These resources are scarce because they are limited in supply and yet society desires more of them than is available.
1.4.2 Unlimited wants
Material wants refer to the desires of consumers to obtain and use various goods and services which provide satisfaction.
Desire for material wants is insatiable. The ends of human beings are without end. The fulfillment of some of the wants on the
list seems to do little more than raise people's expectations of something even better.
There are three reasons why wants are virtually unlimited:
• Goods eventually wear out and need to be replaced.
• People get fed up with what they already own.
• New or improved products become available.
.
Fig 1.1 The basic economic problem visualisation
Scarce
resource
Unlimite
d wants
The economic problem of scarcity applies to every society whether rich or poor. Mckenna P.J (1958:2) writes in his book
Intermediate Economic Theory, "whatever the cause, we find ourselves in a situation of scarcity where we can not have all the
things we want, because the resources we have at any time are limited in supply while our wants appear to be unlimited.” As a
result, societies have to make choices. Economics can also be defined as the study of the ways in which choices are made.
1.5 Economic choices - The requirement of making a choice is a consequence of the problem of scarcity. Resources are limited in
supply relative to demand for goods and services produced from the available resources. As a result society and individuals
2
, should make choices. This can be referred to as ‘economising’ – making the little available best be used to satisfy our wants and
needs.
1.5.1 The basic economic problem of choice
The basic economic problem is universal. Any society (rich or poor) faces the problem of scarcity since resources are limited in
supply. No society can produce all the goods wanted by its people. Society has to decide which commodities to make. For
example, should we produce sugar cane or maize? We have to decide how to make these commodities. Do we employ more
capital or labour? Who is going to use the goods that are eventually made?
Societies must make difficult choices of: -
What to produce and in what quantities?
How to produce?
For whom to produce?
The way in which different societies answer these questions give rise to different economic systems. These fundamental
economic questions can best be examined using a production possibilities curve.
1.6 The production possibilities curve (PPC)
A production possibilities curve or frontier shows what the society could produce with its existing resources at any moment in
time. That is, the PPC shows the maximum output that a society can produce given its existing supplies of land, labour, capital
and technical knowledge. The PPC works on the society's technical knowledge because another society with greater technical
knowledge may be able to produce more given the same quantities of resources.
1.6.1 An example
Let’s assume the following sample conditions for our illustration: -
a) The society can only produce two types of goods, say consumer goods which are those goods which directly satisfy our
wants and capital goods which are those goods which satisfy out wants indirectly by permitting further production of
consumer goods.
b) The available supply of resources is fixed both in quality and quantity.
c) The level of technology is fixed, that is, technology does not change during the course of our analysis.
d) The economy is operating at full employment and is achieving full production.
e) It’s a closed economy, that is, there is no international trade.
With its limited supplies of resources, our society could produce varying combination of consumer and capital goods. The extreme
possibilities are that either all resources are devoted towards producing consumer goods or the resources are devoted to the production
of capital goods. These are unrealistic possibilities since the society can not survive on consumer nor capital goods alone and so, some
combination is essential.
3
, Table 1.2 The production possibilities table
Type of Product Production alternatives
A B C D E
Consumer Goods 0 4 7 9 10
Capital Goods 4 3 2 1 0
From the production possibilities table it can be concluded that economic resources are scarce hence the production of one type of
goods involves the sacrifice of another. This can be represented on a diagram as follows:
Fig 1.2 The production possibilities curve
PPF
5 .S
CAPITAL GOODS
4 A (Unattainable
3 B combination)
2 Idle resources C
1 R
D
0 2 4 6 8 10 12 CONSUMER GOODS
All points on the frontier (e.g. point C) show the maximum possible combined outputs of the two commodities. The society then must
choose the product-mix it desires: more consumer goods mean less capital goods, and vice versa.
It is possible to produce a combination inside the curve (e.g. point R) but this would mean that resources are underutilized, that is, not
fully employed. In such a case, it is possible to produce more of both goods by moving to a point on the boundary.
However, the limited supplies of resources make any combination of consumer and capital goods, lying outside the production possibilities
curve, such as point S, unattainable. Hence product-mix represented by point S will only be possible when the productive capacity
increase. Thus, the curve moves outwards.
1.6.2 Application: The PPC and the economic concepts of scarcity, choice and opportunity cost
A production possibility curve shows that maximum output that a society can produce with its existing resources at any moment in time.
It is often referred to as the 'transformation curve' because in moving from one alternative or product-mix to another, say, from point
B to point C, we are in effect transforming capital goods into consumer goods, by shifting resources from the production of the latter.
Assuming that the society is producing only two goods, consumer and capital goods using its available resources and level of technical
knowledge, its production possibilities can be represented by the following boundary.
4
