Scarcity, choice and opportunity cost
The starting point of economics.
Economics is a social science that studies how societies allocate scarce resources among competing uses to satisfy human wants.
The basic economic problem. Human wants are essentially unlimited, but the resources to satisfy them are limited (scarce). Every society must therefore make CHOICES about how to use resources.
Factors of production (the resources used to produce goods and services):
| Factor | What it is | Income earned |
|---|---|---|
| Land | Natural resources (soil, water, oil, fish, forests) | Rent |
| Labour | Human physical and mental effort | Wages |
| Capital | Manufactured aids to production (machines, factories, computers) | Interest |
| Entrepreneurship | Risk-taking organisation of the other three factors into production | Profit |
Opportunity cost = the value of the NEXT BEST ALTERNATIVE forgone when a choice is made. Every choice has an opportunity cost because resources have alternative uses.
Worked example. A government spends $1 billion on a new hospital. The opportunity cost is the next best use of that money — perhaps 2 new schools, or repaying public debt, or a tax cut.
Opportunity cost is the cornerstone of economic thinking. It forces decision-makers to consider trade-offs rather than just direct costs.
- Scarcity = wants > resources.
- Factors: Land, Labour, Capital, Entrepreneurship.
- Opportunity cost = next-best alternative forgone.