ECON1001 · Introductory Microeconomics
Foundations: Scarcity, Opportunity Cost & Comparative Advantage
Week 1 installs the entire economic toolkit. Economics is the study of choice under scarcity: because resources are limited, every choice has an opportunity cost — the value of the next-best alternative forgone. You decide at the margin (do it while MB > MC), reason ceteris paribus, and map trade-offs with the production possibility frontier (PPF). The payoff concept is comparative advantage: parties specialise where their opportunity cost is lowest and both consume beyond their own PPF through trade.
What this chapter covers
- 01Scarcity and the three economic questions: what, how, for whom
- 02Opportunity cost = next-best forgone; explicit + implicit; excludes sunk costs
- 03Marginal analysis: act while MB > MC, stop at MB = MC
- 04Ceteris paribus and the correlation-vs-causation trap
- 05Production possibility frontier: efficient frontier, inside = waste, outside = infeasible
- 06Slope of the PPF = opportunity cost; bowed-out PPF = increasing opportunity cost
- 07Absolute vs comparative advantage
- 08Gains from trade: exchange and specialisation; price splits the surplus
Comparative advantage and the gains from trade
- 3 marks · both opportunity costsOpportunity cost of 1 fish = (hours per fish) ÷ (hours per timber). Coastland: 2/3 timber per fish. Highland: 6/2 = 3 timber per fish.
- 2 marks · fish CALower opportunity cost in fish wins comparative advantage: Coastland (2/3 < 3) has CA in fish.
- 2 marks · timber CABy the mirror logic, opportunity cost of 1 timber: Coastland 3/2 fish, Highland 1/3 fish. Highland (1/3 < 3/2) has CA in timber.
- 1 mark · price rangeTrade is mutually beneficial when the price of fish (in timber) lies between the two opportunity costs: between 2/3 and 3 crates of timber per crate of fish.
Key terms
- Scarcity
- The fundamental condition that limited resources cannot satisfy all wants, forcing choices and trade-offs.
- Sunk cost
- A cost already incurred and unrecoverable; because it cannot be changed by any current decision, it is excluded from marginal reasoning.
- Production possibility frontier (PPF)
- The boundary of output combinations of two goods achievable when all resources are used fully and efficiently; its slope equals the opportunity cost of the x-axis good.
- Absolute advantage
- The ability to produce more of a good than another party from the same resources — distinct from, and not required for, comparative advantage.
- Gains from trade
- The extra value created when goods move to those who value them most (exchange) and parties specialise by comparative advantage (specialisation).
Foundations: Scarcity, Opportunity Cost & Comparative Advantage FAQ
Why can a country gain from trade even if it is worse at producing everything?
Because gains depend on comparative, not absolute, advantage. Even a party with absolute disadvantage in every good has a lower opportunity cost in something, and specialising there frees the more efficient partner to do what it does best — both end up beyond their own PPF.
What does the slope of the PPF tell me?
It is the opportunity cost of the good on the horizontal axis, measured in units of the good on the vertical axis. A straight-line PPF means constant opportunity cost; a bowed-out PPF means opportunity cost increases as you specialise further.
How is opportunity cost different from accounting cost?
Accounting cost counts only explicit cash outlays. Opportunity cost adds implicit costs — the value of forgone alternatives such as your own time or capital — while ignoring sunk costs that can no longer be changed.
Exam move
Make the opportunity-cost calculation automatic, since it underlies comparative advantage, the PPF slope and every later 'should I do this?' decision. For CA problems, always convert inputs into opportunity-cost ratios before comparing, and remember the mirror rule: whoever has CA in good X automatically has comparative disadvantage in good Y. Sketch a quick PPF for any trade-off question and label inside (waste), on (efficient) and outside (infeasible) so the diagram itself answers feasibility questions.
