- Scarcity being the central economic problem is defined as the inadequacy/insufficiency/inability of (economic) resources or goods and services available to satisfy them. Scarcity is therefore not the same as “few” resources. Since resources are scarce (limited in supply) it implies that such resources have alternative uses and command a non-zero price; thus, scarce resources are known as economic resources and goods and services made available (produced) by utilizing such resources are referred to as economic goods and services. A resource be it land, capital, labour or entrepreneurial ability, can be put to alternative uses (used to satisfy a variety of human wants) eg. in terms of land, a plot can be used for various purposes with a view to satisfying wants on it, one can construct residential houses, commercial buildings, an educational center or farming.
- Choice is (may be) defined as the power of discretion that is the ability and freedom to select from alternatives; choice arises due to scarcity of resources with such resources having alternative uses and therefore cannot satisfy all human wants pertaining to them at the same time. Choice is made between alternatives depending on scale of preference which differ between an individual consumer, producer (firm/investor) or government determined by the view to maximize satisfaction, return and equity on provision (especially) of public and merit goods respectively. A rational consumer chooses those goods (and services) from which maximum satisfaction is derived; for an investor, choice is made of those ventures which yield the highest possible return at least costs; a government that embraces the dictates of good governance would seek to ensure equity in distribution of resources by prioritizing between alternatives, for instance choosing to spend more on public and merit goods (such as defence/law and order and education and health respectively).
- Opportunity cost of an action is the value of the benefit expected from the next best foregone alternative. It’s a derivative concept which arises due to the scarcity of resources (for production) or goods and services (for consumption) which necessitates the making of choice between competing alternative uses where more of a commodity is produced or consumed by reducing the production or consumption of another. From the standpoint of an entrepreneurial ability, the opportunity cost of deciding to organize land, labour and capital in the manufacture of fertilizer in a factory is the value of organizing the same resources in establishing and running a (private) school; the opportunity cost of choosing to be a doctor is the value of the benefit forgone by not being a lawyer.
A CPA course student could have Ksh. 200 and requires both economics and FA1 text books, each costing Kshs. 200. This amount (Kshs. 200) is certainly not enough (such that the two items are mutually exclusive) and therefore calls for the student to choose between the two alternatives, that is, to either buy the economics textbook and forgo the FA text book or vice versa. Assuming that the student opts to buy the economics text book, the opportunity (economic) cost is the value of the benefit forgone by not buying the FA textbook. Accounting profits net of opportunity cost gives economic profit, opportunity cost being an implicit cost.
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