1.
1 Scarcity, Choice and Opportunity Cost
1.1.1 The Fundamental Economic Problem of Scarcity
Definition: Scarcity is the fundamental economic problem. It arises from the basic fact
that while resources are limited (finite), human wants are unlimited (infinite) .
Implication: This imbalance between limited resources and unlimited wants means that
not everyone can have everything they want. It is the reason why we must make choices .
1.1.2 The Need to Make Choices at All Levels
Because of scarcity, choices must be made by all economic agents :
Individuals: Must choose how to spend their limited income (e.g., buy a new phone or
go on a trip) and their limited time (e.g., study or play sports) .
Firms: Must choose what to produce with their limited factors of production (e.g., use a
factory to build laptops or tablets) .
Governments: Must choose how to allocate a limited budget (e.g., spend more on
healthcare or on education).
1.1.3 The Nature and Definition of Opportunity Cost
Definition: Opportunity cost is the value of the next best alternative that is
forgone when a choice is made .
Nature: It arises directly from the need to make choices. It is not all the alternatives, but
simply the single, next best option you give up.
Example: If a government spends $1 billion on building a new high-speed railway, the
opportunity cost could be the new hospitals or schools that cannot now be built with that
money.
1.1.4 The Basic Questions of Resource Allocation
To solve the problem of scarcity, every society must answer three fundamental questions :
Fundamental
Explanation
Question
Deciding the quantity and types of goods and services to create (e.g., more military
What to produce?
equipment or more consumer goods).
Deciding the combination of resources and methods to use (e.g., labour-intensive farming
How to produce?
or capital-intensive factories).
For whom to Deciding how the output is distributed among the population (e.g., who gets to buy the
produce? latest smartphone and who cannot afford it).
1.2 Economic Methodology
1.2.1 Economics as a Social Science
Definition: Economics is a social science because it studies the behaviour and choices of
people and societies .
Methodology: Like natural sciences, economists use the scientific method: they observe
phenomena, create theories, and build models to explain economic behaviour .
Challenge: Unlike scientists conducting lab experiments, economists cannot control all
variables. They deal with complex, unpredictable human behaviour, making it difficult to
test theories with 100% accuracy.
1.2.2 Positive and Normative Statements
This distinction is crucial for understanding the difference between objective analysis and
subjective opinion .
Positive Statements:
o Definition: These are objective statements that can be tested and validated or
rejected against real-world facts .
o Key Feature: They describe "what is" or "what will be." They do not have to be
true, but they must be testable.
o Example: "A rise in the minimum wage will lead to lower employment in the
fast-food sector." This can be proven true or false by looking at data.
Normative Statements:
o Definition: These are subjective statements based on value judgements or
opinions .
o Key Feature: They describe "what ought to be" and cannot be tested. They often
include words like "should," "fair," "good," or "bad."
o Example: "The government should increase the minimum wage to help the poor."
This is an opinion and cannot be proven true or false by facts alone.
1.2.3 The Meaning of the Term Ceteris Paribus
Definition: Ceteris paribus is a Latin phrase meaning "other things being equal" or "all
other things remain constant" .
Use in Economics: Economists use this assumption to simplify the complexity of the real
world. It allows them to analyse the relationship between just two variables (e.g., price
and demand) by assuming that all other influencing factors (e.g., income, taste, weather)
do not change . For example, the law of demand states that, ceteris paribus, as the price
of a good falls, the quantity demanded rises.
1.2.4 Importance of the Time Period
The length of time under consideration is vital in economics, as it affects the ability of firms and
the economy to adjust .
Time
Definition Key Implication
Period
Short A period of time in which at least one factor of Firms can only increase output by
Time
Definition Key Implication
Period
production is fixed. For a firm, this usually means it adding more variable factors (like
Run
cannot change its capital (e.g., factory size) . labour) to the existing fixed capital.
A period of time in which all factors of production are
Long variable. A firm can now increase its capital, change its Firms have full flexibility to adjust all
Run scale of production, and new firms can enter the inputs.
industry .
Very The economy's productive potential
A period of time in which the state of technology and the
Long can increase through innovation, better
quality of factors of production can also change .
Run education, and new inventions