ABU NAYEEM MOHAMMED SUYEEB
CONTACT: 01752408560, 01857175686
Chapter: 1 Basic Concepts
Scarcity and Choice
Scarcity: Humans wants are unlimited while resources are limited. Therefore there are not
enough resources to satisfy our wants. As a result, scarcity exists in every society.
Choice: Resources are limited, therefore we cannot have everything we want. Our limited
income forces us to make choices.
Opportunity Cost
Opportunity cost: Opportunity cost is the next best alternative that is forgone. It is the
sacrifice we make in order to obtain something.
Examples of Opportunity Cost:
For an Individual: I have $1, and I can buy either a candy bar or an Ice cream. If I buy the ice
cream, the opportunity cost is the candy bar which I sacrificed.
For the Government: The government decides to raise its level of spending on healthcare.
The opportunity cost is that it might have spent this money on education instead.
For a Firm: A firm can decide to retain its workers or fire the workers and buy machinery to
replace them. If it decides to keep the workers, its opportunity cost is the machinery that it
could have bought.
Types of Goods
Free Goods: Free goods are goods the production of which involves no opportunity cost. Ex.
Air
Economic Goods: Economic goods are those goods the production of which involves an
opportunity costs. Ex. Table. The wood used to produce table may have been used for other
purposes.
Consumer Goods: These goods are used to satisfy our wants directly. They are used for their
own sake. Ex. Television.
Producer Goods (Capital goods): These goods do not satisfy our wants directly. They are
used to assist in further production. Ex. Bulldozer.
Durable Consumer Goods: These consumer goods lasts for a fairy long time. Ex. A family
car.
Non-Durable Consumer Goods: These consumer goods do not last very long time. They are
used up immediately or in a short period of time. Ex. Food
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ABU NAYEEM MOHAMMED SUYEEB
CONTACT: 01752408560, 01857175686
Factors of Production
Factors of production are resources which assist in further production
Land: Any naturally available resources that helps in further production. Ex. Minerals in the
earth’s surface.
Labour: Any mental or physical human effort that helps in further production. Ex. A
construction worker.
Capital: Any man made resource that helps in further production. Ex. A sewing machine.
Entrepreneur: The risk taker and decision maker of the business. He/she organizes the other
factors of production.
Two types of Capital: Working and Fixed
Working Capital: Capital that gets used up in the production process. Ex. Leather used to
manufacture shoes, rubber used to produce tyres.
Fixed Capital: Capital that does not get used up in the production process. Ex. A factory
building, machinery.
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