Basic Economy Concepts

There are 3 basic economic concepts in relation to economics definition: 

1. Scarcity

The problems of economics arise because we do not have enough resources to produce everything we want. The factors of production are limited and the amount of output that can be produced is also limited.

It means that there are not enough available goods for everyone to freely take as much as they want. Due to this, we have to choose the best alternative of goods and services to be produced by the society.

2. Choice

Because of the resources in the world are limited, we cannot satisfy all our wants and force us to choose. Choice involves a rational decision to be made due to scarcity of resources in order to satisfy unlimited human wants. A choice has to be made among several wants which involves some trade off known as opportunity cost.

3. Opportunity cost

Opportunity cost is concerned with the problem of choice and the fact of scarcity, forces us to make choices. So, that opportunity cost is defined as the value of the best alternative foregone when a choice is made.

Example:

Dina has RM5 and she would like to buy two things: a book and a pen which cost RM5 each (unlimited wants but limited resources). Dina has to choose either to purchase a book or a pen which would satisfy her needs (choices). If Dina chooses the book, then the pen is the opportunity cost because it is the second best alternative which she has to forgone.