Basic Economic Concepts and Principles
Senior 4 · Economics
Basic Economic Concepts and Principles
Lesson 4 of 5
30 min
On 11 June 2026 the Minister of Finance presented a budget of Frw 7,796.3 billion for 2026–27 to Parliament (MINECOFIN). It is the largest in Rwanda's history, and still it cannot pay for everything: every road, classroom, clinic and irrigation scheme that someone could reasonably ask for. The budget divides the money between three pillars: Economic Transformation, 63% (Frw 4,900.9 billion), Social Transformation, 22% (Frw 1,711.3 billion), and Transformational Governance, 15% (Frw 1,184.0 billion). Each franc given to one use is a franc that cannot go to another. That is the central problem of economics, and this lesson gives you the tools to analyse it: scarcity, choice, opportunity cost and the production possibility frontier.
Definition
Scarcity: the situation in which resources are limited compared with the wants they could satisfy. Scarcity is relative: a rich country faces it as much as a poor one.
Choice: deciding which wants to satisfy with scarce resources and which to leave unsatisfied. Consumers rank wants on a scale of preference, a list of wants in order of importance.
Opportunity cost: the next best alternative given up when a choice is made.
Example: a school uses Frw 2 million to buy computers rather than to repair its roof. The opportunity cost is the roof repair (the next best use), not "Frw 2 million".
The chain of ideas is short. Wants are unlimited; resources are scarce; so choices must be made; and every choice has an opportunity cost. Only a free good, one that is not scarce, has an opportunity cost of zero.
Opportunity cost matters to every agent:
The formula, for a move between two choices:
Definition
Production possibility frontier (PPF): a curve showing the maximum combinations of two goods an economy can produce when it uses all its resources fully and efficiently with the technology it has. It is also called the production possibility curve or boundary.
Assumptions. (1) Only two goods are produced. (2) The quantity of resources is fixed. (3) Technology is fixed. (4) All resources are fully employed and used efficiently. (5) The period is short. (6) Resources can be moved between the two goods, though not all are equally suited to both.
An illustrative economy can produce maize and cement. Its production possibility schedule is:
| Combination | A | B | C | D | E | F |
|---|---|---|---|---|---|---|
| Cement (thousand tonnes) | 0 | 100 | 200 | 300 | 400 | 500 |
| Maize (thousand tonnes) | 500 | 490 | 458 | 400 | 300 | 0 |
Reading the diagram.
Worked example 1: opportunity cost along the PPF
Work out the maize given up for each extra 100 thousand tonnes of cement.
| Move | Cement gained | Maize given up | Opportunity cost of 1 t of cement |
|---|---|---|---|
| A → B | 100 | t maize | |
| B → C | 100 | 0.32 t maize | |
| C → D | 100 | 0.58 t maize | |
| D → E | 100 | 1.00 t maize | |
| E → F | 100 | 3.00 t maize |
Interpretation: the opportunity cost of cement rises as more is produced. The first resources moved into cement are those least useful for maize (rocky land, workers with building skills). Later, fertile farmland and skilled farmers must be moved too, and much more maize is lost. This is the law of increasing opportunity cost, and it is why the PPF bows outwards (it is concave to the origin).
The shape of the PPF tells you how opportunity cost behaves.
| Shape | Opportunity cost | When it happens |
|---|---|---|
| Straight line | Constant | Resources are equally suited to both goods (for example two similar crops on the same land) |
| Concave (bowed outwards) | Increasing | Resources are specialised; the usual case |
| Convex (bowed inwards) | Decreasing | Rare: large economies of scale as output of a good expands |
A movement from inside the PPF onto it (cutting unemployment) is not a shift: the frontier itself has not changed.
Worked example 2: Rwanda's economy and its PPF
(a) Is Rwanda on its frontier? NISR's Labour Force Survey 2025 found about 676 thousand people unemployed in a labour force of 5.4 million:
(NISR reports 12.4%, calculated from unrounded figures.) Willing workers without jobs are idle resources, so the economy was producing at a point like U, inside its PPF.
(b) The budget as a choice on a frontier. With the 2026–27 total fixed at Frw 7,796.3 billion, suppose Frw 100 billion were moved from Economic Transformation to Social Transformation. Social Transformation would rise by
and the opportunity cost would be the Frw 100 billion of economic-transformation projects (roads, irrigation, energy) that would no longer be built.
Warning
Opportunity cost is the next best alternative, not all the alternatives, and not the money. If you could use a free afternoon to revise, play football or visit a friend, and you choose to revise, the opportunity cost is whichever of the other two you would have chosen next, not both.
Tip
Inside, on, outside. Inside = waste (unemployment). On = efficient (a trade-off). Outside = impossible now (needs growth). For any PPF question, first say where the point is, then why.
Important
Discuss. A government can choose between more consumer goods today and more capital goods (machines, roads, power plants). Using a PPF, explain why choosing more capital goods today could let a country consume more in ten years' time.
Jacob Clifford, "Production Possibilities Curve". Watch for constant versus increasing opportunity cost and for the meaning of points inside, on and outside the curve; then check them against the maize and cement diagram above.
Practice
Key points
Sources and credits
Written by Ganzaa: the text, the three PPF diagrams (drawn to scale from the schedule), the tables, the worked examples and the practice items. The maize and cement schedule is illustrative.
Quick check
Why does a typical PPF bow outwards, so that the opportunity cost of cement rises as more cement is made?
