There are basically three3 fundamental economic problems which are scarcity, choice and opportunity cost.

Scarcity

This means limited supply. The main cause of economic problems is scarcity of resources to satisfy the unlimited wants. To economists, all things are said to be scarce. All goods are scarce relative to people’s desire for them or there are unlimited wants and limited resources. Thus despite the increasing volume of goods and services produced in the world human wants can’t be satisfied. Since resources are limited relative to wants then man has to make choice.

Choice

This is the taking of the right decision at the right period of time. Since resources are scarce, individuals have to decide on what to consume and what to leave out while producers have to decide on what to produce and what to leave out. The making of choice necessitates one to rank needs according to the order of preference (priority). The arrangement of one’s needs according to priority with the most pressing ones coming first is known as a scale of preference.

Opportunity cost

This is the alternative that is foregone when choice is made. It is the real cost of something in terms of the foregone alternative. When one decides to consume a commodity, he or she foregoes another or some unit of it and thus the foregone commodity becomes the opportunity cost. In production, due to the limited resources, producers have to decide on what to produce with the available resources and thus leave out other products e.g. a farmer that decides to plant maize and not beans on the limited land makes beans the opportunity cost of maize.

In the real world, it is not always a total rejection on one commodity in favour of another but instead producing or consuming a bit more or less more of another..

Uses of the concept of opportunity cost

• Used when consumers are making consumption decisions. i.e. Making choice of what to consume
• Used when firms are making production decisions e.g. allocation of resources.
• Used when labour is making a decision on whether to work or enjoy leisure.
• Used when a country is deciding what to produce in international markets (specialisation).
• Used when pricing factors of production. I.e. the higher the opportunity cost the higher the price.

The three fundamental economic problems are related in that since resources are scarce relative to human desires for them, producers and consumers have to make choice, in making choice they forego the next best alternative.