1.1 Scarcity

Scarcity is the core economic problem: resources are limited while wants are not, so individuals, firms, and governments must choose. Every choice has an opportunity cost — the value of the next-best alternative given up — and economists measure the cost of anything by what you sacrifice, not just what you pay.

The scarce resources are the four factors of production: land (natural resources), labor (human effort), capital (tools, machines, and buildings — not money), and entrepreneurship (organizing the other three and bearing risk). MCQs love asking which category an item belongs to; a factory is capital, the manager's know-how is labor or entrepreneurship.

Scarcity applies even to things that are plentiful: gasoline, water, and hospital beds are all scarce because at a zero price people want more than exists. Microeconomics studies how individual decision makers respond to that scarcity, while macroeconomics studies the economy as a whole.