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Course: Microeconomics > Unit 1
Lesson 1: Introduction to economicsLesson summary: Scarcity, choice, and opportunity costs
An introduction to the concepts of scarcity, choice, and opportunity cost
Economic resources are scarce. Faced with this scarcity, we must choose how to allocate our resources. Economics is the study of how societies choose to do that. Microeconomics focuses on how individuals, households, and firms make those decisions.
Key terms
| Term | Definition |
|---|---|
| Scarcity | The fact that there is a limited amount of resources to satisfy unlimited wants |
| Economic resources | Things that are inputs to production of goods and services. There are four economic resources: land, labor, capital, and technology. Technology is sometimes referred to as entrepreneurship. |
| Land | Natural resources that are used in the production of goods and services. Some examples of land are lumber, raw materials, fish, soil, minerals, and energy resources. |
| Labor | Work effort used in the production of goods and services. Some examples are the number of workers and number of hours worked. |
| Capital | Physical goods that are produced and used to produce other goods. Examples of capital would be machinery, technology, and tools such as computers; hammers; factories; robots; trucks, and trains used to transport goods; and other equipment employed in the production of a good or service. |
| Technology | (sometimes called entrepreneurship) The ability to combine the other productive resources into goods and services. |
| Occam's razor | the logical principle that states you should make no more assumptions than the minimum amount needed to perform analysis; in economics, we use the concept of Occam's razor when we invoke the ceteris paribus assumption. |
| ceteris paribus | A Latin phrase essentially meaning "all else equal", which is used in economics to emphasize the idea that the only changes you should be thinking about are the ones that are explicitly described; for example, if we are talking about how someone reacts to a change in the price of a good, you should assume the only thing changing is price and not preferences, income, or anything else. |
| normative statements | statements that describe opinions or how things ought to be. |
| positive statements | statements of fact or description of how something actually is. |
Key Takeaways
Scarcity and Choice
Scarcity is why economics exist: we wouldn't have to worry about how scarce resources are allocated if those resources were unlimited. It should be emphasized that economics is primarily concerned with the scarcity of resources.
Positive vs. normative analysis
Economic analysis tends to focus mostly on positive analysis, that is, the description of phenomena, facts, and concepts. It can be tempting to analyze things using normative analysis, that is, describing things as they ought to be.
However, you shouldn't interpret that to mean that normative thinking is completely absent in economics and especially in policy-making: both are important for well-formed policy.
Economic models
A model is a simplification of a concept or process that is used to better understand that process by cutting away as much as possible to focus on key aspects. For example, a map is a model of how roads are laid out and where they intersect. Maybe there is other useful or interesting information, like the location of an interesting mural or the world's best taco stand, but if we are just interested in getting to the store, we don't need that, we just need to know how to get there.
Economists rely on models because it's impossible to capture the full complexity of human interaction, let alone try to do it in a straightforward and easy to read way!
Common errors
- Not all costs are monetary costs. Opportunity costs are usually expressed in terms of how much of another good, service, or activity must be given up in order to pursue or produce another activity or good.
- You might hear the fourth economic resource referred to as either entrepreneurship or technology. The terms are used interchangeably but mean the same thing: the ability to make things happen. Take the example of computers—a computer itself would be considered a good, but our ability to make computers would be considered technology.
- The word capital is used in everyday language to mean what economists would call financial capital. If you see the word capital on its own in an economics context, it refers to physical capital—equipment, machinery, or tools used to produce goods and services. Physical capital is tangible, but financial capital isn't always so.
Want to join the conversation?
Is financial capital the same as money? Or does it also encompass other money-related entities, such as credit, loans (is it the same as credit?), credit cards and debit cards, and cheques?(23 votes)
While money (currency) and capital may seem like the same thing, they are not. Capital is a much broader term that includes all aspects of a business that can be used to generate revenue and income, i.e., the company's people, investments, patents, trademarks, and other resources.(1 vote)
What're the 3 ways to deal with scarcity?(4 votes)- NVM I found them. In case anyone else is curious:
economic growth
reduce our wants, and
use our existing resources wisely (Don't waste the few resources that we do have.)(7 votes)
- How would one describe the perspectives of scarcity and choice(2 votes)
Scarcity is the basic economic problem because each level of economic has unlimited wants and limited resources. Economic has various level (individually, firms and governments).
Because of the "Time" is scarcity/limited as individually, we as "individually" has to make decision wisely. For example we as individuals want a lot of money and also a lot of time to spend with family. So we need to choose wisely about our wants in order to use "Time" (Scarce Resource) efficiently.
There is the concept of Production Possibilities Frontier is being used. Whether to use the time to get a lot of money or to spend time with family.(7 votes)
- guys I'm not even in middle school can someone help me understand this better pls :((0 votes)
Don´t worry about not understanding it right now, many adults have trouble understanding it. What you need to know is that:
Scarce Resource:
A scarce resource is one that runs out, no matter how much of that resource there acually is.
Lets take food as an example, there is a lot of food in the world, but if we hunt too much or don't replant fruits and vegetables, then we have no more food left.
Economic Resources:
Things that are needed to produce goods and services.
There are four economic resources: land, labor, capital, and technology.
Technology is sometimes referred to as entrepreneurship.
Normative Statements:
Statements that describe opinions.
Positive Statements:
Statements that can be tested.
Economic Model:
A model that is used to estimate something that has to do with the economy.
(Think of data models you use when doing a science experiment, except these are used to hypothesize.)
If you have anymore questions, don't understand something, or want to go into depth with something specific, just ask!(10 votes)
- Faced with this scarcity, "we" must choose how to allocate our resources.
Can someone explain who is "we" described in the sentence above? Is it refer to government? Who really needs to allocate our resources exactly?(3 votes) 
To what extent is Studying at University an Economic Choice?(3 votes)
been there done that :-)
it is to some extent an Economic Choice (yep, I "aced" a promotion interview because I had better qualifications than the interviewer, who was suitably impressed, and got a pay rise to go with my new role).
University is also a social thing, where folks "network", and meet folks that can help them and/or they can help, in the future.
For some (like me) University was a chance to leave home, and set up somewhere I chose (rather than the town my parents chose to raise me in), It can lead to more money, but it can also lead to a greater sense of fulfillment, and allow folks to explore opportunities that they otherwise would struggle to find. (see also Maslow's Hierarchy of Needs)(3 votes)
I am still having difficulty in understanding the differences between normative and positive analysis.(2 votes)
Normative analysis refers to the process of recommending the best thing to do, while positive analysis uses scientific facts to reach a conclusion.(4 votes)
- Does the skill of a factory worker (gained through training, practice, and perhaps inherent talent/suitability) count as Labor, Capital, or Technology?
(to me, the skill of a factory worker, let alone a craftsman, seems to have elements of all three!)
Similarly, what does a highly skilled job like an airline pilot count as?(3 votes)
no one said it cant be all three and to me it seems like it can fit in all three... labour is the work so i think capital(1 vote)
- I wanna know why that even there is no scarcity, there will still be opportunity cost? could somebody explain a bit....like the exact relationship between scarcity and opportunity cost?(3 votes)
- Even in a hypothetical scenario where resources are not scarce, opportunity cost still exists because it is inherent in the concept of making choices. Opportunity cost refers to the value of the next best alternative forgone when a decision is made. Even if resources are abundant, individuals, firms, or societies still have to make choices about how to allocate those resources among competing alternatives. In making those choices, they must consider what they are giving up in order to pursue one option over another, leading to opportunity cost.(1 vote)
What is micro and what is macro(2 votes)
Microeconomics is the study of singular markets, essentially businesses interacting with consumers, while Macroeconomics is a picture of all markets working together in a country's economy.(3 votes)
