Building Blocks in Economics: The Problem of Choice

Scarcity and choice, opportunity cost, the Production Possibility Curve, the three central questions, and planned, market and mixed economies.

Key ideas

Wants are unlimited but resources are limited, so every person, firm and country must choose (scarcity).
The opportunity cost of a choice is the value of the next best option given up.
Every economy must decide what to produce, how to produce it and for whom.
A Production Possibility Curve shows the combinations of two goods that can be made with all resources used efficiently: more of one means less of the other.
Production can be labour-intensive (more workers, as in handicrafts) or capital-intensive (more machines, as in steel).
In a planned economy a central authority decides; in a market economy prices and private owners decide; a mixed economy, like India’s, has both.
Public goods like roads, parks and street lights are open to all, so governments usually provide them.

Remember

Economics	from the Greek “oikonomia”, household management
Opportunity cost	the value of the next best option given up
Three central questions	what to produce? how? for whom?
Factors of production (in the book)	land, labour, capital, technology
Savings	income − spending on essentials − spending on non-essentials
India’s reforms	1991: more room for markets, with a role kept for government

Watch out

Counting every option given up as the opportunity cost: it is only the next best one.
Confusing needs (food, water, shelter) with wants (gadgets, holidays).
Thinking a market economy has no government at all: almost every economy is mixed.

Worked example

A family earns ₹27,000 a month. It spends 49% on essentials and 18% on non-essentials, and saves the rest. How much does it save, and what is one opportunity cost of saving?

Working: 33% of 27,000

Answer: ₹8,910; the things it could have bought now with that money.