This Unit is about the Fundamental Problems in Economics.


These are basic issues dealt with and faced by individuals and society concerning resource allocation and they include; scarcity, choice and opportunity cost.


Is the limit in supply of resource relative to the unlimited need for them. It is also the limitedness in supply of something in relation to the demand for it.

In economics, resources are highly limited and are unequally distributed between nations and individuals in relation to human wants that have to be satisfied.

Human wants are desires that have to be satisfied to make life worthwhile. They include non-material wants and material wants.

Material wants are tangible e.g. shelter, food, and clothing.

Non material wants are intangible e.g. health services, prestige education, self-esteem, entertainment etc.

Human wants come as a result of the social environment in which people live and they have the following features;

They are unlimited.

They are competitive in order to satisfy one another.

They are complementary. In order to yield maximum satisfaction, some wants have not to be sacrificed with others.  e.g. when you have food you must have water.

Human wants are dynamic. They are ever changing from one period to another.

They are recurring i.e. they must be satisfied ever so often because scarcity, choice has to be made by individuals.


Is the selection of certain variables or alternatives out of many or the making of a decision. It involves the selection of desires or wants to be satisfied in a given period of time according to priority. In making choice, one usually has a scale of preference which is the list of needs which have to be satisfied according to one with the most pressing on top and the least pressing at the bottom.

Man is rational and usually chooses widely. The problem of choice usually guides decision making of individuals and business firms in relation to the basic economic questions which are;

  1. What to produce and consume and in what quantity,
  2. For whom to produce (rich or poor),
  • How to produce (technique of production,)
  1. Where to produce from (location of enterprise),
  2. When to produce (timing of output/production on how to maximize profit)

Making choice usually involves the element of opportunity cost.


Refers to the alternative foregone when a choice is made. It is the second best alternative that has to be foregone when choice is made.

The three fundamental economic problems are usually interrelated in such a way that because resources are scarce economic units must make choice and in the process of making choice, some alternatives are foregone.


Used by consumers in making consumption decisions because  the consumer usually consumes goods that are lowly priced in relation to those which are highly priced in order to maximize his satisfaction.

Used by producers in making production decisions like what to produce, how to produce it and usually producers decide to produce commodities whose opportunity cost is the lowest in order to maximize the profits.

It is used as a basis for planning by government especially in aspect of resource allocation.

It is applied in pricing factors of production in such a way that those factors where opportunity cost is high than those with low opportunity cost.

It is used in determining gains from international trade. A country usually gains when it specializes in producing commodities where it incurs the least opportunity  cost compared to other countries.

It is used by producers in deciding on what techniques of production to use and this usually depends on the factor availability and the opportunity cost.

Workers use the concept of opportunity cost in making a decision on whether they should work or enjoy leisure.

The concept is used in pricing goods and services in a way that a commodity which has high opportunity cost of production has higher market price compared to one with a low opportunity cost.


It is subjective and not standard. No standard value of opportunity cost can be applied to specific choices and the level of opportunity cost varies from one person to another.

It cannot be applied where the factors of production are specific and have no alternative uses and in such cases the opportunity cost is zero.

It cannot work where the factors of production are immobile and cannot move to alternative uses and locations.

Opportunity cost may not be measurable in certain cases where the alternative foregone cannot be ascertained. This is because opportunity cost has no absolute values.

It is based on the assumptions of rational consumers and producers but in real life there are some irrational consumers and producers.

A market imperfection where there is no perfect knowledge makes it hard to know the opportunity cost in making decisions.

Opportunity cost works under condition of full employment but is an ideal situation which can’t be attained in any economy.




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