Economics · Chapter 1
Study notes aligned to the official NEB syllabus.
Economics is the social science that studies how individuals and societies use their limited resources to satisfy their unlimited wants. Because human wants keep multiplying while the means to satisfy them are always short, every society is forced to make choices. This chapter builds the foundation of the whole course by explaining scarcity, choice, opportunity cost, the production possibility curve, the way resources are allocated, and the role of division of labour and specialisation.
Scarcity is the central economic problem. It means that the resources available to a society, namely land, labour, capital and entrepreneurship, are limited in supply, whereas human wants are unlimited and ever growing. A commodity is said to be scarce when its supply is less than the demand for it at a zero price. It is important to note that scarcity is a relative concept. Air is abundant and free, so it is not an economic good, but clean bottled water is scarce and commands a price.
Because resources are scarce, no individual or society can have everything it wants. Every want cannot be satisfied, so some wants have to be chosen and others postponed or sacrificed. This act of selecting some wants for satisfaction out of many is called choice. Scarcity gives rise to choice, and choice gives rise to the problem of allocation of resources.
The moment we choose one thing, we give up the next best alternative. The value of the next best alternative that is sacrificed in order to obtain a chosen thing is called opportunity cost, also known as alternative cost or real cost. For example, if a farmer uses a piece of land to grow wheat, the opportunity cost of the wheat is the maize he could have grown on the same land. Opportunity cost is expressed not in money but in terms of the alternative forgone. The concept is fundamental because every economic decision, from a household budget to a national plan, involves a sacrifice of alternatives.