Scarcity-Choice-Opportunity Cost (Basic Economic Problem)

Introduction to Economics possible to use more labor and less

capital, or vice versa. It is possible, for
Defining Economics: instance, to produce an item with an aim
to maximize the number of people
Economics is a study of human behavior as a employed. Alternatively, an item may be
relationship between unlimited human wants and produced with an aim to minimize the
limited resources which have alternative uses. total expenses that members of society
incur. Somehow, a decision must be made
What Scarcity Is Not? about the mix of resources used in
Scarcity is not a shortage. After a hurricane hits production, the way in which they are
and cuts off supplies to a community, TV organized, and how they are brought
newscasts often show people standing in line to together at a particular location.
get minimum amounts of cooking fuel and food. A
news commentator might say that the line is 3. For whom will items be produced? Once
caused by the “scarcity” of these products. But an item is produced, who should be able
cooking fuel and food are always scarce—we to obtain it? People use scarce resources
cannot obtain all that we want at a zero price. to produce any item, so people value
Therefore, do not confuse the concept of scarcity, access to that item. Thus, determining a
which is general and all-encompassing, with the mechanism for distributing produced
concept of shortages as evidenced by people items is a crucial issue for any society.
waiting in line to obtain a particular product.

Scarcity is not the same thing as poverty. Scarcity All of these decisions involve trade-off if we
occurs among the poor and among the rich. Even decide to produce consumer goods then capital
the richest person on earth faces scarcity. For
goods will be foregone whereas decision of “for
instance, even the world’s richest person has only
limited time available. Low-income levels do not whom to produce” involves whether resources
create more scarcity. High income levels do not are used for rich or poor.
create less scarcity. Scarcity is a fact of life, like
gravity. And just as physicists did not invent Economic Resources;
gravity, economists did not invent scarcity—it Factors of production can be classified in many
existed well before the first economist ever lived. ways. Here is one such classification:
It has existed at all times in the past and will exist
at all times in the future. 1. Land. Land encompasses all the
nonhuman gifts of nature, including
Almost every good we as individuals or as society timber, water, fish, minerals, and the
consume costs something and is scarce. By original fertility of land. It is often called
consuming one good, another good is foregone. the natural resource.
2. Labor. Labor is the human resource,
Therefore, scarcity forces decisions and trade-
which includes productive contributions
offs to be made. made by individuals who work, such as
Web page designers, iPad applications
The key economic decisions which any society creators, and professional football
has to make involve; players.
3. Physical capital. Physical capital consists
1. What and how much will be produced?
of the factories and equipment used in
This requires the choice between types of
production. It also includes improvements
economic goods that society might
to natural resources, such as irrigation
produce by making use of scarce
ditches.
resources. The main types of economic
4. Human capital. Human capital is the
goods are capital and consumer goods.
economic characterization of the
education and training of workers. How
2. How will items be produced? There are
much the nation produces depends not
many ways to produce a desired item. It is
only on how many hours people work but

Shahid Saghir Head of Economics Department Aitchison College

 also on how productive they are, and that decision making undertaken by
in turn depends in part on education and individuals (or households) and by firms.
training. To become more educated, It is like looking through a microscope to
individuals have to devote time and focus on the small parts of our economy.
resources, just as a business has to devote Macroeconomics is the part of economic
resources if it wants to increase its analysis that studies the behavior of the
physical capital. Whenever a worker’s economy as a whole. It deals with
skills increase, human capital has been economy-wide phenomena such as
improved. Entrepreneurship (actually a changes in unemployment, in the general
subdivision of labor) is the component of price level, and in national income.
human resources that performs the
functions of organizing, managing, and `Microeconomic analysis, for example, is
assembling the other factors of concerned with the effects of changes in
production to create and operate the price of gasoline relative to that of
business ventures. Entrepreneurship also other energy sources. It examines the
encompasses taking risks that involve the effects of new taxes on a specific product
possibility of losing large sums of wealth or industry. If price controls were
on new ventures. It includes new reinstituted in the United States, how
methods of doing common things and individual firms and consumers would
generally experimenting with any type of react to them would be in the realm of
new thinking that could lead to making microeconomics. The effects of higher
more income. Without entrepreneurship, wages brought about by an effective
hardly any business organizations could union strike would also be analyzed using
operate. the tools of microeconomics.

Finally, there is the special human In contrast, issues such as the rate of
resource, distinct from labor, called inflation, the amount of economy-wide
entrepreneurial ability. The entrepreneur unemployment, and the yearly growth in
performs several socially useful functions: the output of goods and services in the
nation all fall into the realm of
The entrepreneur takes the initiative in macroeconomic analysis. In other words,
combining the resources of land, labor, macroeconomics deals with aggregates,
and capital to produce a good or a or totals—such as total output in an
service. Both a spark-plug and a catalyst, economy. Be aware, however, of the
the entrepreneur is the driving force blending of microeconomics and
behind production and the agent who macroeconomics in modern economic
combines the other resources in what is theory. Modern economists are
hoped will be a successful business increasingly using microeconomic analysis
venture. —the study of decision making by
individuals and by firms—as the basis of
Microeconomics versus Macroeconomics macroeconomic analysis. They do this
because even though macroeconomic
Economics is typically divided into two analysis focuses on aggregates, those
types of analysis: microeconomics and aggregates are the result of choices made
macroeconomics. Microeconomics is the by individuals and firms.
part of economic analysis that studies

Positive Economics vs Normative Economics economy "should be" or "ought to

be."While positive economics is based on
 Positive economics describes and explains facts, normative economics is based on
various economic phenomena in value judgments.
verifiable terms.
Most public policy is based on a
 Normative economics focuses on the combination of both positive and
value of economic fairness, or what the normative economics.

Shahid Saghir Head of Economics Department Aitchison College

 Scarcity Choice Opportunity Cost
Not all wants can be fulfilled so to decide The next best alternative forgone is
for one, the alternative has to be forgone. known as opportunity cost.

If we are given with fixed supply of If a govt decide to construct an

Unlimited Wants chasing resources and decide to construct a dam, airport the next best alternative to
Limited resources this choice of ours mean less of everything this could be a university that could
else that could have been produced with have been built.
the resources used in the construction of
dam.

If resources would have been unlimited, we would not be making choices between the alternatives and none
of decision of ours would entail an opportunity cost. Examples of opportunity Cost

Consumers With limited Budget consumer is confronted with

millions of choices, if he has exhausted all his income
now to increase the consumption of Jam, he may have
to cut down the consumption of Butter (that is assumed
to be the next best alternative to jam) so the
opportunity cost of jam shall be butter.

Producer Given all the resources are fully utilized, if a farmer

wants to increase the production of wheat, he may have
to sacrifice some land from cattle farm (that is the next
best alternative to wheat)
Government If government has utilized all the resources to the full
potential, then to build more schools some
infrastructure has to be sacrificed. (If we assume
infrastructure to be the next best alternative of schools)

Individuals Deciding between study or watching a football match.

Production possibility Curve a way to illustrate Since opportunity cost is the next best alternative
opportunity Cost, Scarcity, and Choices. forgone, the amount of skis sacrificed can be

Production possibility frontier shows the

combination of two goods that could be produced,
with the given available resources. At the point A
on the graph all the resources are dedicated to the
production of 350 skis per month but zero
snowboards are made. Likewise various
combination of skis and snowboard could be made
e.g at point B, 300 skis and 100 snowboards are obtained from graph i-e 50 skis for 100
made. snowboards.

Scarcity means choice has to be made in Assumptions of PPC

production and consumption. Given the fixed
supply of resources, to produce 100 extra a) Tech is constant
snowboards resources are withdrawn from skis. b) Resources are fixed in supply

Shahid Saghir Head of Economics Department Aitchison College

 c) Only two goods are produced f) Natural disaster and War.
d) Resources are fully utilized g) Depletion of natural resources due to
over usage.
Shape of PPC; it is downward sloping and concave h) Climatic changes.
to the origin for the following reasons: i) Investment in health.
j) Change in working hours
a) Production is subject to the diminishing
k) Change in retirement age
return
l) Capital Formation.
b) Rise in training cost
m) Increase in the level of full employment
c) rise in transportation cost.
n) Increase in female participation in the
d) To increase the production of good X
workforce.
some quantity of good y has to be
sacrificed Utilizing underutilized resources/ Utilizing
e) Resources in one use may not be equally previously unemployed resources for example;
suitable for alternative usage Decrease in unemployment.
f) If resources are equally suitable and
production is subject to constant return What is not attainable? Any point that lies outside
then PPC would be drawn as downward PPC are not attainable because resources available
sloping straight line. are not sufficient to reach that specific point.

Causes of shift of PPC; The PPC curve can shift due What causes movement along the PPC; Increase
to the changes in the quantity and quality of in the production of either good would cause
resources, such as capital, labor, and technological movement along the PPC.
resources. The main possible factors responsible
for pivotal and parallel shift of PPC/PPF are listed What causes pivotal shift of PPC;
below;
a) Improvement in the quality of resources
PPC is a dynamic phenomenon that changes with suitable for the production of either
time, mainly due to; commodity taken on the axis of PPC.
b) Increase in the quantity of resources
a) Investment in education. suitable for the production of either
b) Discovery of new resources. commodity taken on the axis of PPC.
c) Technological changes taking place over
time.
d) New production methods.
e) Innovations.

Shahid Saghir Head of Economics Department Aitchison College