Basic economics ideas

and resource allocation

SCARCITY, CHOICE & OPPORTUNITY COST

Meaning of Economics
• One of the most quoted definitions of Economics today is
perhaps, “Economics is a science which studies human behavior
as a relationship between ends and scarce means which have
alternative uses.”. This Definition was given by Lionell Robbins in
1935.
• If we put in simple words, Economics is the study of human
bahaviour in relation to their wants. It studies how human beings
manage their scare resources in trying to satisfy their wants.
 Scarcity
• Scarcity means limitation of the availability of resources in relation
to their wants. That means the available resources are not enough
to completely satisfy all the wants.

• By now, you must have already learnt that human beings have
unlimited wants. And as the resources with which these wants must
be satisfied are limited, we can understand that ‘scarcity’ is the
central economic problem of everyone including individuals, firms
and the government, and even the whole world.
 Opportunity Cost

If we decide and choose which want to satisfy with the available

resource, then there are other wants we have to leave unsatisfied.

We have to forgo something in order to satisfy a want. The want that

is forgone is called the ‘opportunity cost’.

It is also known as ‘the next best alternative’.

 Inevitability of choices at all levels
The existence of scarcity forces people, firms, and societies to choose some of their wants
that can be satisfied and other wants to be left unsatisfied.

Economics helps us to make wise choices to achieve the highest possible satisfaction. Hence,
economics is a science of making best choices in order to satisfy our needs and wants.

Where there is scarcity, there is choice, and every choice has its opportunity cost. If there is
no scarcity, there is no choice and no opportunity cost, i.e., free goods.

• Choice means selection of something for consumption or production. Every “choice” is

accompanied by opportunity cost.
• Opportunity cost is the benefit of the next best alternative sacrificed due to the current
choice having been made.
Examples:
• At an individual level: An individual faces the basic economic
problem if he has ₦200 and wants to buy a Bigi cola and chips
with prices of ₦150 and ₦100, respectively. He is unable to
buy both due to his limited income; hence, is forced to make a
choice. If he chooses Bigi cola, the benefit he could have from
consumption of chips is his opportunity cost.
• At a firm’s level: A firm may have to choose either an
advertising campaign or instalment of new machinery in the
factory because it does not have enough resources to do both.
Choice of advertising campaign will have the opportunity cost
of new machinery.
At the government level: A society may face basic economic problem
when it does not find enough resources to develop a school network in
rural areas as well as wants to strengthen its defense system. Choice of
strong national defense will lead to the sacrifice of the benefit she
could have from improved education.
• Opportunity Cost is even present between the choice of present or
future. 
• If a society chooses high standard of living in future, it must invest
more today to reap high in future. More investment today means less
consumption and lower standard of living in the present.
• Present consumption is the opportunity cost of investment and
better future living standards. 
 The basic economic questions
There are some basic questions faced by every society. How they are answered
depends largely on the type of economic system the country has. The questions are:

1. What to produce?

2. How to produce?

3. For whom to produce?

1. What to produce? This mainly depends on consumers in a free market. The

consumers choose the product they like and thus their choices direct the types of
production that should be carried out. The firms will follow this because this is the
most profit maximizing combination. Sometimes the government too can decide what
to produce. The government may decide to produce an essential good or service which
everyone ought to have.
2. How to produce? 
This question will be answered by those supplying the goods and
services. If the supplier is a private firm, it will seek to use the method
which will give the maximum profit.

For example, production can be done using labour intensive method

and capital intensive method. The private firm will decide on the
method which will give lowest average costs.

If the government is the supplier, it may try to use the method which
promotes welfare of the society rather than maximising the profit.
3. For whom to produce?
 For whom to produce will also depend on the suppliers (government and
private firms). The consumers are the target of production, but the kind of
consumers the firm or the government wants to target is the question.

The government usually produces for the general public where as the private
firms can seek to maximize profit by producing for the high and rich level
customers as well as the general public. In simple words, the production is
done for those who are willing to pay.

Note: among the suppliers, there will also be private individuals(sole traders).
Their objective in production is the same as that of the private firms – that is,
to maximise profit