Unit 1: Basic Economic Concepts
Lesson 1: Scarcity
Scarcity
Key Concept: Scarcity is the central problem of economics. It refers to the limited
availability of resources in contrast to unlimited human wants and needs. This limitation
forces individuals, firms, and societies to make choices about how to allocate resources
effectively.
Understanding Scarcity
Scarcity arises because resources are finite, but human wants are infinite. This
situation gives rise to the core question in economics:

How do we allocate scarce resources to maximize benefits?
Scarcity affects decision-making at every level:



Individuals: Limited income forces choices between goods and services.
Firms: Limited resources like labor, capital, and raw materials necessitate tradeoffs and choices regarding production.
Societies: Must decide how to allocate resources like land, labor, and capital for
the collective good.
Scarcity and Its
Implications
Scarcity of money
Scarcity of land
Scarcity of labor
Example
Choosing between buying groceries or paying for
entertainment.
Deciding between agricultural use and urban
development.
Allocating workers to industries based on demand and
productivity.
Scarcity Leads to Choices
Scarcity necessitates making trade-offs. For example:


Individual level: A limited budget requires choosing between necessities and
luxuries.
Societal level: A government must decide between investing in education or
healthcare.
Opportunity Cost:
Every choice involves an opportunity cost, which is the value of the next best
alternative foregone.
For example:

Choosing to study instead of going out with your friends to get better grades.
Trade-Offs vs. Opportunity Costs
Concept
Definition
Trade-Offs
Sacrificing one thing to gain
another.
Opportunity
Cost
The value of the next best
alternative foregone when a
decision is made.
Example
Choosing between pizza, a
cheeseburger, or a chicken sandwich at
lunch.
Choosing pizza means giving up the
benefit of enjoying a cheeseburger, your
next preferred option.
Microeconomics vs. Macroeconomics
Economics is divided into two main branches, each focusing on different scales:
Microeconomics
Macroeconomics
Studies individual decision-makers Examines the economy as a whole, focusing on
like households, firms, and
aggregate measures to understand how the
consumers.
economy functions at a national or global level.
Examples of questions: How do
Examples of questions: How does fiscal policy
firms decide what to produce? How
affect national output?
do prices form?
Topics: Consumer behavior,
supply, demand, and price
elasticity.
Topics: Inflation, unemployment, GDP, and
monetary policy.
Factors of Production
The resources used to produce goods and services are known as factors of
production. These are divided into four categories:
Factor
Description
Examples
Land
Natural resources used in production.
Water, oil,
minerals, land.
Labor
Human effort, including physical and mental
work.
Factory workers,
engineers.
Capital
Physical tools and man made goods used in
the production process
Machinery,
buildings, training.
Entrepreneurship
The ability to combine resources to create
goods/services and take risks in the process.
Steve Jobs, Bill
Gates.
Examples of Trade-Offs and Opportunity Costs
Trade-Offs:


At lunch, you can choose between pizza, a cheeseburger, or a chicken
sandwich.
If you choose pizza, the cheeseburger and chicken sandwich are your tradeoffs.
Opportunity Cost:


If your first choice of pizza is unavailable, you choose the cheeseburger instead.
The opportunity cost of choosing pizza is the value of the cheeseburger, your
next best alternative.
Key Terms Summary
Here are essential terms to review:
Term
Definition
Scarcity
Limited resources vs. unlimited wants, leading to trade-offs and
opportunity costs.
Opportunity Cost
Value of the next best alternative given up for choosing another
option.
Trade-Offs
Sacrifices made when choosing one option over another.
Microeconomics
Study of individual decision-makers and resource allocation.
Macroeconomics
Study of the economy as a whole, focusing on aggregate
measures like GDP and inflation.
Factors of
Production
Resources used in production: land, labor, capital, and
entrepreneurship.