Introduction to Economics
Senior 4 · Economics
Introduction to Economics
Lesson 1 of 3
20 min
Think about the last month of your life. Did you get everything you wanted — every piece of clothing, all the airtime, every trip, and all the free time to do exactly as you pleased? Almost certainly not. And neither did anyone you know: not the busiest trader at Kimironko market, not the wealthiest company in Kigali, and not the Rwandan government when it drew up its national budget. At every level, everyone runs into the same wall — there is never enough to satisfy every want.
That single fact is the starting point of the whole subject. Human wants are effectively unlimited, but the resources available to satisfy them are limited. Economists call this scarcity, and nearly everything you study this year is a tool for coping with it. This lesson gives you the core vocabulary and the habits of thinking you will rely on in every later unit, so it is worth getting exactly right.
A need is something you must have to survive: food, clean water, shelter, basic clothing, essential healthcare. A want is anything you desire beyond that — a smartphone, a second pair of shoes, a trip to Rubavu. Needs are limited, but wants are effectively unlimited: satisfy one and another appears in its place.
Scarcity is the condition in which the resources available are not enough to produce everything people want. Be careful to separate it from a shortage. A shortage is temporary — the shop runs out of sugar this week. Scarcity is permanent and universal: even if every shop were full, no economy on Earth has the resources to give everyone everything they want. Scarcity is the reason economics exists.
Because most things are scarce, using them up has a cost. A good that is scarce, so that having more of it means less for someone else, is an economic good — a plate of food, a litre of petrol, a place at a good school. These carry a price precisely because they are scarce.
A free good is the rare exception: something so abundant that using it costs nobody anything, so it carries no price. Sunlight falling on the hills of Rwanda is a free good — your using it takes none away from your neighbour. Almost everything of interest to an economist, though, is an economic good.
Scarcity forces choice. Because you cannot have everything, selecting one thing always means giving up another. The value of what you give up is the true cost of your decision, and it has a name: opportunity cost is the value of the next best alternative that you forgo when you make a choice.
Read that definition twice, because the two most common mistakes are hidden inside it. Opportunity cost is (1) the next best single alternative — not the sum of everything you did not choose — and (2) measured by the value of that alternative, which need not be money.
Worked example
Mutesi owns a small tailoring workshop in Nyamirambo. One afternoon she has just enough cloth, thread and time to do exactly one of three jobs:
Step 1 — she can pick only one, because the resource (her afternoon) is scarce. She chooses the most valuable job: the uniforms, at 15,000 Frw.
Step 2 — identify what is given up. By choosing uniforms she gives up both other jobs. But opportunity cost counts only the best of the things forgone. The best alternative to uniforms is the head-wraps at 10,000 Frw, not the repairs.
Step 3 — state the opportunity cost. The opportunity cost of sewing uniforms is 10,000 Frw — the head-wrap profit she gave up. It is not 16,000 Frw (adding both jobs together is the classic error) and it is not 6,000 Frw (the repairs were not the best alternative).
The same idea works far beyond one workshop. Suppose the government has 1 billion Frw and can build either a rural health centre or upgrade a district road, but not both this year. If it builds the health centre, the opportunity cost is the road that was not built. Notice that here the cost is not really about money at all — the money is spent either way — it is the most valuable thing the money could have bought instead. Every choice, by a person, a firm or a nation, carries an opportunity cost.
To model these choices, economists usually assume people are rational: they weigh the benefit of an action against its cost and act only when the benefit is at least as large. They also assume decisions are made at the margin — that is, by asking ‘should I do a little bit more, or a little bit less?’ rather than ‘all or nothing?’. A trader does not ask whether to sell tomatoes at all; she asks whether selling one more crate is worth the effort. These two assumptions underpin almost every model you will meet.
Microeconomics studies the individual pieces of the economy: a single household deciding how to spend, one firm deciding how much to produce, or the market for one good — say, the price of tomatoes at Kimironko. Macroeconomics studies the economy as a whole: total national output (GDP), the general level of prices (inflation), unemployment across the country, and the exchange rate of the Rwandan franc. Micro looks through a microscope at the parts; macro steps back to view the whole.
Economists are careful to separate two kinds of claim. A positive statement is about what is: it is factual and can, in principle, be tested against evidence and shown true or false. A normative statement is about what ought to be: it is a value judgement, it usually contains a word such as should, ought, fair or too much, and no amount of data alone can prove it.
Compare these two:
Good analysis keeps them apart: work out positively what will happen, then let society debate the normative question of what should be done.
The real economy has millions of moving parts, so economists build models — deliberate simplifications that keep the essential relationships and strip out the rest, the way a map leaves out most detail so you can actually use it. To study one change at a time they rely on the Latin phrase ceteris paribus, meaning ‘other things being equal’. When we say ‘if the price of rice rises, ceteris paribus, people buy less rice’, we are holding incomes, tastes and all other prices constant so that the effect of the price change alone can be seen.
Tip
Exam technique — two traps that cost easy marks
Attempt each question before reading the solution beneath it.
Habimana has a free Saturday. He could earn 8,000 Frw doing casual work, or watch a football match he values at 5,000 Frw, or sleep. He decides instead to revise for his economics test. What is the opportunity cost of revising?
Classify each statement as positive or normative: (i) ‘Rwanda’s inflation rate last year was about 5%.’ (ii) ‘The government should reduce the tax on cooking oil.’
Is each of these a microeconomic or a macroeconomic question? (i) Why did the price of beans at one market rise last month? (ii) Why did national unemployment fall this year?
A farmer chooses to plant maize rather than beans on her one hectare, and cannot plant both. In one sentence, what is the opportunity cost of the maize?
List the alternatives he gave up: the casual work (8,000 Frw) and the football (5,000 Frw). Opportunity cost is the value of the best one forgone, which is the casual work. So the opportunity cost of revising is 8,000 Frw. It is not 13,000 Frw — adding the two together is wrong — and it is not zero just because revising involves no spending; the time given up has real value.
(i) is positive: it states a fact that can be checked against the data. (ii) is normative: the word ‘should’ signals a value judgement about what is desirable.
(i) is microeconomic — it concerns a single good in a single market. (ii) is macroeconomic — it concerns the whole economy.
The opportunity cost of the maize is the beans she could have grown on that hectare instead — the best alternative use of the same scarce land, given up when she chose maize.
Summary — the ideas to carry forward
