CPE: Scarcity, Choice and Opportunity Cost

What is Scarcity? (Central Economic Problem)

The basic and central economic problem faced by all societies, arising from limited resources and unlimited wants.

What are Resources?

Also known as Factors of Production (FOPs). The limited amount of inputs available to produce goods and services.

What are the four broad categories of resources (FOPs)?

Capital, Entrepreneurship, Land, Labour (CELL).

What is Capital (FOP)?

Man-made resources, typically refers to physical capital such as machines, factories, transportation, and other equipment. (Does NOT mean financial capital).

What is Entrepreneurship (FOP)?

An individual who organises and manages other factors of production (CELL) to innovate new products/production ways, taking business risks and overall responsibility for decision-making.

What is Land (FOP)?

All natural resources available, which can be renewable (e.g., wind, water) or non-renewable (e.g., fossil fuels, mineral ores).

What is Labour (FOP)?

Human capital; refers to people, including their skills and abilities. Quantity available consists of those willing and able to work (employed and unemployed).

Why are Choices Inevitable? (Reason for Choices)

Due to the fundamental economic problem of scarcity, individuals and societies face constraints and must make choices.

What is Opportunity Cost? (Concept Definition)

The (expected) benefits from the next best alternative that is forgone when making a decision.

What are Explicit Costs? (Included in Opportunity Cost)

Costs that require a direct money payment (out-of-pocket expenses).

What are Implicit Costs? (Included in Opportunity Cost)

Costs that do not require a direct money payment, but represent the value of anything other than the direct payment that is sacrificed (e.g., time).

Is Opportunity Cost Subjective?

Yes, it differs between individuals and societies because only the individual making the choice can identify and quantify the value of their most attractive forgone alternative.

Does Opportunity Cost vary with circumstances? (Reason for Variation)

Yes, a person's valuation of forgone benefits changes with circumstances and different points of decision making.