ECB1101 · Introductory Microeconomics
Economic Way of Thinking
Economics is the study of choice under scarcity: human wants are unlimited but resources — time, labour, capital, land — are finite, so every choice means giving something up. The value of that next-best alternative forgone is the opportunity cost, and it — not the dollar price on the tag — is what every decision is really weighed against. This opening week (Mankiw Ch 1–2) sets the three moves the rest of ECB1101 reuses: opportunity cost, the production possibility frontier (PPF) that draws scarcity and efficiency in one curve, and thinking at the margin (do more while marginal benefit exceeds marginal cost, stop at MB = MC). It also separates positive claims (what is, testable) from normative ones (what ought to be, value-laden), and explains why economists reason with deliberately simple models under ceteris paribus.
What this chapter covers
- 011.1 Scarcity & the economic problem
- 021.2 Opportunity cost (and why sunk costs are irrelevant)
- 031.3 The production possibility frontier (PPF)
- 04On / inside / outside the curve · the bowed-out shape
- 051.4 Thinking at the margin — the MB = MC rule
- 061.5 Positive vs normative statements
- 071.6 Models & assumptions (ceteris paribus)
Worked example: reading opportunity cost off a PPF
- +2(a) Opportunity cost of one X = units of Y given up ÷ units of X gained = 20 ÷ 10 = 2 units of Y per unit of X.
- +2(b) Bowed-out PPF means increasing opportunity cost: resources are not equally good at making both goods, so each extra unit of X costs more Y than the last. The 2-for-1 rate rises as you push X further.
- +1(c) A point inside the curve is inefficient — resources are idle or unemployed, so the economy could make more of both goods without giving anything up.
Key terms
- Scarcity
- The gap between unlimited human wants and the finite resources available to satisfy them. Scarcity is what forces every individual, firm and society to choose, and it is the reason economics exists.
- Opportunity cost
- The value of the next-best alternative forgone when you make a choice — the single best thing you gave up. It is not the sum of everything you did not do, and not the dollar price; for students it is usually time.
- Sunk cost
- Money already spent that cannot be recovered (a non-refundable ticket, last semester's fees). Because it is the same whatever you choose next, it is irrelevant to a rational forward-looking decision — it is not an opportunity cost.
- Production possibility frontier (PPF)
- The curve showing the maximum combinations of two goods an economy can produce with all resources fully and efficiently used. On the curve = efficient; inside = inefficient; outside = unattainable. Its slope is the opportunity cost; bowed out = increasing opportunity cost.
- Marginal analysis
- Comparing the benefit of one more unit (marginal benefit) with its cost (marginal cost). The optimising rule is to keep going while MB > MC and stop where MB = MC — the same logic returns as MR = MC for the firm and SMB = SMC for society.
Economic Way of Thinking FAQ
Is opportunity cost the same as the price I pay?
No — this is the most common Week 1 trap. Opportunity cost is the value of the next-best alternative you give up, which may be quite different from the dollar price. If you spend an evening studying, the price is roughly zero but the opportunity cost is the wage you could have earned or the sleep you lost. And money already spent (a sunk cost) is never part of it: rational choice looks only forward, weighing the marginal benefit of the next action against its opportunity cost.
What does a point inside, on, or outside the PPF mean?
On the curve is efficient — no waste, the economy is making the most it can. Inside the curve is inefficient — resources are idle or unemployed, so more of both goods is possible. Outside the curve is unattainable with current resources and technology. Moving from inside to on the curve is not economic growth, it is just ending the waste; genuine growth shifts the whole frontier outward (more resources or better technology).
Why is the PPF bowed out instead of a straight line?
Because of increasing opportunity cost: resources are not equally suited to making both goods. As you push production of one good further, you have to pull in resources that were better at the other good, so each extra unit costs more of the other than the last. A straight-line PPF would instead mean constant opportunity cost — read the shape the question actually draws before saying 'increasing'.
How do I tell a positive statement from a normative one?
A positive statement is descriptive, about what is, and can be tested against evidence ('a rent cap raises the quantity of housing demanded'). A normative statement is prescriptive, about what ought to be, and rests on values ('the government should cap rents'). The word should or ought is usually the giveaway. The exam expects you to label which is which, so scan for value words.
Exam move
Run a four-question checklist on any decision problem: (1) What is scarce? (2) What is the opportunity cost of the chosen option — the next-best forgone, ignoring sunk costs? (3) Is this a marginal choice — compare MB to MC? (4) Is the claim positive or normative? For the PPF, practise reading the slope as an opportunity-cost ratio (Y given up ÷ X gained) and remember bowed-out = increasing opportunity cost. If a Section C question asks you to draw a PPF, label both axes, mark at least two points, and arrow the trade-off you are describing — unlabelled diagrams lose marks.
