Your Comprehensive Study Notes: Scarcity, Choice & Opportunity Cost

Hey everyone! Welcome to the very first, and most important, chapter in Economics. Think of this as the foundation for everything else you'll learn. We're going to explore why we can't have everything we want (sad, I know!), how this forces us to make choices, and what the real cost of those choices is. Don't worry if it seems tricky at first, we'll break it down with simple examples. Let's get started!


1. The Heart of Economics: Scarcity

What is Scarcity? The Fundamental Problem

At its core, Economics is the study of how we deal with one simple, universal problem: scarcity.

Scarcity is the condition where our wants for goods and services are greater than the resources available to satisfy them.

  • Unlimited Wants: Humans are never fully satisfied! We always want more or better things. Think about it: you want the latest iPhone, a holiday in Japan, bubble tea every day, and more time to hang out with friends. Our wants are endless.

  • Limited Resources: The resources we use to produce goods and services (like labour, raw materials, time, and money) are finite. There's only so much to go around.

So, the main problem is: Unlimited Wants vs. Limited Resources. Because of this mismatch, we can't have everything. This is the problem of scarcity, and it affects everyone, from you and me to the government.

Because of Scarcity, We Must Make Choices

Since we can't have it all, scarcity forces us to choose. We have to decide what we will have and what we must give up.

Example: You have two hours before bed. You want to finish your Economics homework AND watch a new movie. Because your time (a resource) is scarce, you must choose one.

This leads to a simple flow: Scarcity → Choice

Scarcity Leads to Competition

When resources are scarce, people will compete for them. To decide who gets the scarce goods, we use different criteria. This is a form of discrimination.

In economics, discrimination just means telling the difference between people based on certain rules to decide who gets what. For example, in a shop, the criterion is price – those who are willing and able to pay the price get the goods. In a queue for a limited-edition sneaker, the criterion is 'first-come, first-served'.

Common Mistake Zone: Scarcity vs. Shortage

This is a classic exam question, so pay close attention! Scarcity and shortage are NOT the same thing.

Scarcity:

  • A universal and permanent condition.
  • Exists because wants are unlimited but resources are limited.
  • It applies to almost everything. (e.g., Diamonds are scarce, and so is a doctor's time).

Shortage:

  • A temporary market situation.
  • Happens when the quantity demanded is greater than the quantity supplied at a specific price.
  • It can be solved by raising the price. (e.g., At the start of the pandemic, there was a shortage of face masks at their old price. When the price went up, the shortage disappeared).
Section 1: Key Takeaway

Scarcity is the basic economic problem of unlimited wants vs. limited resources. It forces us to make choices and leads to competition. Remember, scarcity is forever, but a shortage is temporary!


2. Free Goods vs. Economic Goods

What's a "Good"?

In economics, a good is anything that satisfies human wants. This can be a physical object (like a phone) or a service (like a haircut).

Free Goods

A free good is a good where the quantity available is sufficient to satisfy ALL our wants for it, even at zero price. Therefore, no choice is needed to get it, and no sacrifice is made.

  • Key feature: There is NO opportunity cost involved in its consumption.
  • Examples: Sunlight, air in an open field, seawater at the beach. There's so much of it that anyone can have as much as they want without depriving others.

Watch out! A "free gift" from a shop is NOT a free good. Resources were used to make it, so it's an economic good to society. It's just free to you at that moment.

Economic Goods

An economic good is a good where the quantity available is INSUFFICIENT to satisfy all our wants for it. In other words, it is scarce.

  • Key feature: An opportunity cost IS ALWAYS involved to produce or obtain it. We have to give up some resources to get it.
  • Examples: Almost everything! Your textbook, tap water, public parks, a doctor's advice. More of it is always preferred.
Section 2: Key Takeaway

The difference is simple: Is there a cost to society? If you have to give up something to get it (opportunity cost), it's an economic good. If you don't, it's a free good.


3. The Real Cost: Opportunity Cost

Defining Opportunity Cost

Since choosing one thing means giving up another, every choice has a cost. In economics, we call this the opportunity cost. This is one of the most important concepts you'll ever learn!

The opportunity cost of a decision is the highest-valued option forgone.

It’s not just about money! It’s about the value of the next best alternative you didn't choose.

Analogy: You have a free ticket to see either a movie with Iron Man or a movie with Captain America. You can only see one. You slightly prefer Iron Man. By choosing the Iron Man movie, your opportunity cost is the enjoyment you gave up from watching the Captain America movie.

Step-by-Step: Calculating Opportunity Cost

To find the full opportunity cost of a decision, we need to consider two parts: the explicit cost and the implicit cost.

Full Opportunity Cost = Explicit Cost + Implicit Cost

Explicit Cost: This is the actual money you pay for something. It's the out-of-pocket expense. (e.g., The tuition fees you pay for university).

Implicit Cost: This is the value of the highest-valued alternative you give up that isn't a direct money payment. (e.g., The salary you could have earned from a full-time job if you weren't at university).

Let's Try an Example!

Siu Ming is deciding whether to quit his job as a clerk, which pays $15,000 per month, to start his own online shop. He estimates the shop will cost him $5,000 per month for rent and supplies. What is Siu Ming's full opportunity cost of running the shop for one month?

Step 1: Identify the Explicit Cost.
This is the direct money payment. Here, it's the $5,000 for rent and supplies.

Step 2: Identify the Implicit Cost.
What is the highest-valued option Siu Ming is giving up? His job. The value of that is the $15,000 salary he forgoes.

Step 3: Calculate the Full Opportunity Cost.
$$Full\;Opportunity\;Cost = Explicit\;Cost\;(\$5,000) + Implicit\;Cost\;(\$15,000) = \$20,000$$

So, the true economic cost for Siu Ming to run his business for a month is $20,000.

What is NOT a Cost? The Past is the Past!

Sometimes, we spend money on something that we can't get back, whether we go ahead with our choice or not. In economics, this past, irrecoverable expenditure is NOT part of the opportunity cost of a current decision.

Example: You paid $800 for a non-refundable ticket to a concert. On the day of the show, your friend invites you to a fantastic birthday party. You'd rather go to the party. What is the cost of going to the party?

The $800 is gone no matter what you do. You can't get it back. So, it's NOT a cost of your decision now. The real opportunity cost of going to the party is the enjoyment you give up by not going to the concert.

Section 3: Key Takeaway

Opportunity Cost is the highest-valued option forgone. It includes both money paid out (explicit) and value given up (implicit). Money already spent that can't be recovered doesn't count!


4. Interest: The Cost of Getting Things Sooner

What is Interest?

Most people prefer to have goods and services now rather than later. This is called 'time preference'. To persuade people to give up consumption today (i.e., to save their money), you need to offer them a reward. That reward is interest.

Conversely, if you want to consume something today but don't have the money, you have to pay a price to borrow it. That price is also interest.

Interest as an Opportunity Cost

Interest can be seen as the opportunity cost of current consumption.

So, we can say that interest is the cost of the earlier availability of resources.

Example: You have $1,000. You can either spend it now on a new pair of headphones, or you can put it in a bank account that pays 5% interest. If you buy the headphones, your opportunity cost is not just the $1,000, but also the $50 in interest you could have earned over the year. The interest is the cost of getting the headphones 'earlier'.

How Interest Rates Affect Our Choices

The interest rate affects the trade-off between consuming now and saving for the future.

  • When the interest rate is high, the cost of consuming now is higher (you give up more potential interest). This encourages people to save more and spend less.
  • When the interest rate is low, the cost of consuming now is lower. This encourages people to spend more and save less.
Did You Know?

The concept of interest isn't just for individuals. Governments and large companies also make decisions based on interest rates. A lower interest rate can encourage a company to borrow money to build a new factory, boosting the economy.

Section 4: Key Takeaway

Interest is the reward for saving or the cost of borrowing. It represents the opportunity cost of consuming goods and services earlier rather than later. Higher interest rates make saving more attractive.