Week 1 · Chapter

Chapter 1 — Scarcity, Opportunity Cost, the PPF & Economic Models

Principles of Microeconomics Free sample edition

The module's primary reading · ~35–45 minutes · Objective 1 (use the tools of economic modeling — scarcity, opportunity cost, the production possibilities frontier, comparative advantage, and the gains from trade — and distinguish positive statements (what is) from normative statements (what ought to be)) · Read it first this week; the lecture, the slides, the tutorial, and the quiz all build on it.

In plain language

Economics is the study of how people choose when they cannot have everything they want. This week starts with scarcity (having fewer hours, dollars, and other resources than your wants call for), so every choice has an opportunity cost (the value of the best option you gave up to make it). You will draw your first economic picture, the production possibilities frontier (a graph of every pair of amounts of two goods an economy can make when it uses all of its workers well). A concert ticket priced at 60 dollars can really cost you 120 dollars once you count the 4 hours of pay you skip. You will also learn to tell a claim you can check with evidence from a claim about what people ought to do.

Why you already care about this

You have one free evening. A band you love is playing, and a ticket costs 60 dollars. You were also offered a 4-hour shift that pays 15 dollars an hour. You cannot do both.

Most people would say the concert costs 60 dollars. But that leaves something out. If you go, you also give up the 60 dollars you would have earned at the shift. Counted honestly, the evening costs you 120 dollars, not 60. That gap between the price tag and the real cost is the first idea in economics, and it shows up in every choice you make, from how you spend a free afternoon to how a city spends its budget.

This chapter gives you the tools economists use to think about trade-offs like that one. You will price a personal choice, then scale the same idea up to a whole economy on a small island that gathers fish and coconuts.

By the end of this chapter you will be able to:

compute the opportunity cost of a choice, counting time and forgone wages as well as money;
read the opportunity cost of one good off a production possibilities frontier;
explain why a frontier bows outward;
classify a combination as on, inside, or outside a frontier and say what each means;
describe what an economic model leaves out and why;
label a statement as positive or normative.

Carry this line with you: inside the frontier means wasteful, not impossible.

Where we are

This week: scarcity and opportunity cost, the production possibilities frontier, how economists build models, and positive versus normative statements.
How they connect: this chapter is the foundation, so there is no earlier week to lean on; every later week uses opportunity cost, the frontier, and the positive-versus-normative habit you build here.
Where we're going next: Week 2, Comparative Advantage, Specialization & the Gains from Trade, uses opportunity cost to explain why two people, or two countries, both gain by trading.

This is the first week of the course, so nothing earlier is assumed. You need no economics background. The only math is adding, subtracting, multiplying, and dividing, plus reading a simple graph. Next week leans hardest on the opportunity-cost arithmetic in Sections 1 and 3, so take your time with it.

1. Price a choice: scarcity and opportunity cost

Think about the free evening again. You have one evening, a fixed amount of money, and more things you would like to do than either can cover. That squeeze has a name.

Scarcity is the condition in which people's wants outrun the time, money, and other resources available to meet them, so every use of a resource means giving up another use.

Scarcity is why every choice is a trade-off, a choice in which getting more of one thing means accepting less of something else, because the resources to have both are not available. Scarcity is not the same as being poor. A wealthy person still has only 24 hours in a day.

When you make a trade-off, the thing you give up has a value, and economists put a name on it.

Opportunity cost is the value of the single best alternative given up to make a choice, counting time and forgone earnings as well as any money paid.

Notice the word single. You may have several things you could do instead of the concert: work the shift, study, or sleep. The opportunity cost is the value of the best one of those, not all of them added together.

Worked example — the concert evening. A concert ticket costs 60 dollars. Going means 4 hours away from a shift that pays 15 dollars an hour, and the shift is your best alternative.

Money you pay: 60 dollars for the ticket.
Wages you give up: 4 hours × 15 dollars an hour = 60 dollars.
Opportunity cost of the evening: 60 + 4 × 15 = 60 + 60 = 120 dollars, not 60.

In words: the concert really costs you 120 dollars, because the 60 dollars of pay you pass up is as real a cost as the 60 dollars you hand over at the door. If the concert is worth more than 120 dollars to you, go and enjoy it. If not, the shift is the better use of your evening.

Misconception check. Students often think the cost of a choice is its money price, so the concert "costs 60 dollars." That is tempting, because the price tag is the number you see. But your time has a value too. Once the 60 dollars of forgone wages count, the evening costs 120 dollars. Whenever a choice uses your time, ask what that time could have earned.

Memory hook: the real cost is the best thing you gave up, not the price tag.

2. Draw the trade-off: the production possibilities frontier

Now scale the same idea up from one person to a whole economy. Picture a small island with a fixed number of workers. Each day they can gather coconuts from the trees, catch fish in the lagoon, or do some of each. The numbers below are illustrative, made up for this course to make the logic visible. They are not data from any real place.

The island's choices are shown in the table. Each column is one combination the island can make in a day when every worker is busy and doing the task that suits them.

The island frontier: fish and coconuts the island can gather per day with all workers fully employed (illustrative values)
Fish per day	0	10	20	30	40	50	60
Coconuts per day	105	100	90	75	55	30	0

The production possibilities frontier is a graph of every combination of two goods an economy can make when it uses all of its resources fully and efficiently; it is often shortened to PPF.

Here is the island's frontier described in words. Fish per day run along the horizontal axis, from 0 to 60. Coconuts per day run up the vertical axis, from 0 to 105. The curve starts high on the vertical axis at (0, 105), where the island gathers only coconuts. It ends on the horizontal axis at (60, 0), where it catches only fish. In between, the curve passes through (10, 100), (20, 90), (30, 75), (40, 55), and (50, 30). Each pair is written fish first, then coconuts.

The frontier is a menu, not a wish list. It shows what the island can make, not what anyone wants it to make. Moving along the frontier toward more fish always means fewer coconuts, because the workers who start fishing stop climbing trees.

In practice (your tools). Open the free Desmos graphing calculator in a browser. Click the plus sign at the top left of the expression list and choose "table." Type the fish values 0, 10, 20, 30, 40, 50, 60 down the first column and the coconut values 105, 100, 90, 75, 55, 30, 0 down the second. Desmos plots the seven combinations, and you can see the curve they trace. In Google Sheets, put the same two rows in columns A and B, select them, and choose Insert, then Chart, then set the chart type to "Scatter chart."

Misconception check. Students often read the frontier as the island's goal, as if every combination on it were something the islanders want. That is tempting, because the curve looks like a target. But the frontier only shows what is possible. Which combination the island should choose is a separate question, and it depends on what the islanders value.

Memory hook: the frontier is the menu; choosing from it is a separate question.

3. Read the slope: opportunity cost rises along the frontier

Every step along the frontier is a trade-off with a price. The price of more fish is paid in coconuts. That price is the frontier's slope, read as an opportunity cost.

Worked example — the first and last 10 fish. Compare two steps of 10 fish each.

The first 10 fish: moving from (0, 105) to (10, 100) gives up 105 − 100 = 5 coconuts.
Per fish, that is 5 ÷ 10 = 0.5 coconuts.
The last 10 fish: moving from (50, 30) to (60, 0) gives up 30 − 0 = 30 coconuts.
Per fish, that is 30 ÷ 10 = 3 coconuts.

In words: the first fish the island catches cost half a coconut each, but the last ones cost 3 coconuts each. That is 3 coconuts versus 0.5 coconuts, six times the cost for the same catch, so the island should think hard before it sends its last tree climbers to fish.

Here is every step of 10 fish, so you can see the cost climb.

Coconuts the island gives up for each extra 10 fish, and the opportunity cost per fish (illustrative values)
Step in fish	0 to 10	10 to 20	20 to 30	30 to 40	40 to 50	50 to 60
Coconuts given up	5	10	15	20	25	30
Coconuts per fish	0.5	1	1.5	2	2.5	3

As a check, the six steps add up to 5 + 10 + 15 + 20 + 25 + 30 = 105, every coconut the island can gather. Moving from all coconuts to all fish gives up the whole coconut harvest, one step at a time.

Why does the cost rise? The workers are not all alike. When the island first starts fishing, it sends the workers who are best at fishing and only so-so at climbing. Each fish costs few coconuts. As it keeps shifting, it has to send its best tree climbers into the lagoon. They catch few fish and leave many coconuts on the trees, so each fish now costs more coconuts.

That rising cost is what makes the frontier bow outward, bulging away from the corner where the two axes meet. Near the top left the curve is fairly flat: a few coconuts buy many fish. Near the bottom right it is steep: many coconuts buy only a few fish.

A straight-line frontier would mean every fish costs the same number of coconuts, no matter how many the island catches. That happens only when every worker is equally good at both tasks. It is a special case, not the rule.

Misconception check. Students often assume a straight-line frontier is the normal shape, because a straight line is the easiest to draw. But a straight line means the opportunity cost never changes. Real workers, land, and tools are better at some jobs than others, so real frontiers bow outward and the opportunity cost of a good rises as you make more of it.

Memory hook: a bowed frontier means a rising cost, not a constant one.

4. Test three combinations: on, inside, and outside the frontier

The frontier splits every possible combination into three groups. Testing a combination is a matter of comparing it with what the frontier allows at the same number of fish.

An efficient point is a combination on the production possibilities frontier, where the economy cannot make more of one good without making less of the other.

Worked example — three combinations. Test each one against the frontier.

On the frontier: at 30 fish the frontier gives 75 coconuts, so (30, 75) is on it and efficient. The island cannot add a coconut without losing some fish.
Inside the frontier: (30, 50) has 75 − 50 = 25 fewer coconuts than the island could gather at 30 fish, so it is attainable but wasteful. Some workers are idle, or some are doing jobs that do not suit them.
Outside the frontier: at 40 fish the frontier gives 55 coconuts, so (40, 70) asks for 70 − 55 = 15 more coconuts than the island can gather and is unattainable. No way of assigning today's workers reaches it.

In words: on the curve is the best the island can do, inside the curve is doable but leaves 25 coconuts on the trees, and outside the curve is out of reach with today's workers and tools.

In practice (your tools). In the same Desmos graph, type (30,75) on a new line, then (30,50), then (40,70). Desmos plots each one. The first sits on the curve, the second sits below it, and the third sits above and to the right of it.

Misconception check. Students often say a combination inside the frontier is "impossible." That is tempting, because inside sounds like being shut out. But the island can easily make 30 fish and 50 coconuts; it only has to waste some effort. It is the combinations outside the frontier that are unattainable. Inside means wasteful, not impossible.

Memory hook: on is efficient; inside is wasteful; outside is out of reach.

5. Grow the island: an outward shift of the frontier

The frontier is drawn for today's workers, skills, and tools. Change those, and the whole curve can move.

Suppose the island gains more workers, builds better fishing nets, or learns a faster way to climb trees. With more or better resources, it can make more of both goods. The whole frontier shifts outward, away from the corner where the axes meet. Some combinations that were outside today's frontier, such as (40, 70), could come within reach. An outward shift of the whole frontier is how economists picture growth.

Honesty note: the course does not pin a new frontier for the grown island, so there are no new numbers to compute here. The idea is the direction: more resources or better technology push the frontier out, and losing resources, as after a storm that ruins the nets, pulls it in.

There is an important difference between moving along the frontier and moving the frontier itself. Sliding along the curve from (30, 75) to (40, 55) is a trade-off: the island gets 10 more fish but gives up 20 coconuts. A shift of the curve is different. After an outward shift, the island can have more fish without giving up any coconuts at all.

Misconception check. Students often think that moving along the frontier toward more fish is growth, because the island is catching more fish. That is tempting, because "more" sounds like growth. But a move along the frontier gives up coconuts to get the fish, so the island is no richer overall. Growth is a shift of the whole frontier outward, which lets the island have more of both.

Memory hook: moving along the curve is a trade-off; moving the curve is growth.

6. Build a model: simplify on purpose, all else equal

You have now used your first economic model. The island is not real, and it leaves out almost everything about real economies. That is the point.

An economic model is a simplified picture of how part of the economy works, which keeps the few forces that matter for one question and leaves out the rest on purpose.

Think of a bus route map. It leaves out every building, tree, and pothole, and it bends the streets into neat lines. That is why it works: it answers one question, which bus gets you where you are going, without burying you in detail. The island model answers one question too: what does more of one good cost in terms of another?

Models lean on a key assumption.

Ceteris paribus is Latin for "all else equal": the assumption that every influence a model leaves out stays constant while one thing changes.

When the island moves from 30 fish to 40 fish, ceteris paribus says the number of workers, the weather, and the tools all stay the same. Only the split of work between fish and coconuts changes. Without that assumption, you could not tell what caused what.

Economics has two main branches, and they differ in where they point the camera.

Microeconomics is the study of the choices made by individual households and firms and of how single markets work.

Macroeconomics is the study of the economy as a whole, including total output, the overall price level, unemployment, and money.

This course is microeconomics. Your concert evening, the island's choice of fish or coconuts, and, later, the price of a coffee or a used bicycle are all micro questions. In Week 3 you will meet the course's next model, the demand curve, which describes how buyers respond to a price.

Caveat: a model is judged by whether its predictions hold up, not by whether it describes every detail. A model with illustrative numbers, like the island, teaches the logic; it never claims to describe a real market.

Misconception check. Students often think a model is useless because it is unrealistic. That is tempting, because the island leaves out so much. But leaving things out is what makes a model useful, the same way a bus map is useful because it skips the buildings. A model earns its place when its predictions hold up.

Memory hook: a good model leaves things out on purpose, not by accident.

7. Sort the claims: positive versus normative statements

Economists make two very different kinds of claims, and a careful reader keeps them apart.

A positive statement is a claim about what is, or what would happen, that can be checked against evidence, at least in principle.

A normative statement is a claim about what ought to be, which rests on values and cannot be settled by evidence alone.

"Positive" here does not mean good, and "normative" does not mean bad. Positive means testable. Normative means value-laden. A positive statement can be false; it is still positive, because evidence could show it is false.

Worked example — sorting four claims. These statements come from a fresh scenario, a city council debating its budget, and are not from the island.

"If the city closes the downtown library on weekends, fewer people will borrow books on weekends." Positive: the city could count weekend loans before and after the change.
"The city should keep the library open on weekends." Normative: the word "should" signals a judgment about what is better.
"Repairing the main road this year would leave less money for new park benches." Positive: it is a claim about the budget's trade-off, which the city's accounts can check.
"Road repairs matter more than park benches." Normative: two people who agree on every fact could still rank these differently.

In words: a statement is positive when evidence could, in principle, settle it, and normative when it depends on what someone values. Words such as should, ought, better, and fair are clues to a normative claim, but the real test is whether evidence alone could settle it.

The two kinds of claims work together. Positive analysis tells a city council what each choice would cost and what it would bring. The council's values then decide which choice to make. Economics is strongest when it keeps the two labelled.

Pause and choose one of these to think about before you read on:

(a) Think of a recent argument you heard about a choice a family, team, or workplace made. Write down one positive claim and one normative claim from it.
(b) Think of a choice you made this month that used your time. Write down one positive claim about what it cost you and one normative claim about whether it was worth it.

Misconception check. Students often think "positive" means a good or hopeful statement and "normative" means a negative one. That is tempting, because those are the everyday meanings of the words. But in economics positive means testable and normative means value-laden. "Closing the library will cut weekend loans" is positive even though it sounds like bad news.

Memory hook: testable is not the same as good; value-laden is not bad.

Key terms

scarcity — The condition in which people's wants outrun the time, money, and other resources available to meet them, so every use of a resource means giving up another use. (first used: 1. Price a choice: scarcity and opportunity cost)
trade-off — A choice in which getting more of one thing means accepting less of something else, because the resources to have both are not available. (first used: 1. Price a choice: scarcity and opportunity cost)
opportunity cost — The value of the single best alternative given up to make a choice, counting time and forgone earnings as well as any money paid. (first used: 1. Price a choice: scarcity and opportunity cost)
production possibilities frontier — A graph of every combination of two goods an economy can make when it uses all of its resources fully and efficiently; it is often shortened to PPF. (first used: 2. Draw the trade-off: the production possibilities frontier)
efficient point — A combination on the production possibilities frontier, where the economy cannot make more of one good without making less of the other. (first used: 4. Test three combinations: on, inside, and outside the frontier)
economic model — A simplified picture of how part of the economy works, which keeps the few forces that matter for one question and leaves out the rest on purpose. (first used: 6. Build a model: simplify on purpose, all else equal)
ceteris paribus — Latin for "all else equal": the assumption that every influence a model leaves out stays constant while one thing changes. (first used: 6. Build a model: simplify on purpose, all else equal)
microeconomics — The study of the choices made by individual households and firms and of how single markets work. (first used: 6. Build a model: simplify on purpose, all else equal)
macroeconomics — The study of the economy as a whole, including total output, the overall price level, unemployment, and money. (first used: 6. Build a model: simplify on purpose, all else equal)
positive statement — A claim about what is, or what would happen, that can be checked against evidence, at least in principle. (first used: 7. Sort the claims: positive versus normative statements)
normative statement — A claim about what ought to be, which rests on values and cannot be settled by evidence alone. (first used: 7. Sort the claims: positive versus normative statements)

Summary

Scarcity means every choice is a trade-off.
Opportunity cost is the single best alternative given up, and it counts time and forgone wages.
A production possibilities frontier shows every combination an economy can make with all its resources.
The frontier's slope is an opportunity cost, and a bowed-out shape means that cost rises.
On the frontier is efficient, inside is attainable but wasteful, and outside is unattainable.
An outward shift of the whole frontier is growth; a move along it is a trade-off.
An economic model leaves out detail on purpose and holds everything else equal.
Positive statements can be tested with evidence; normative statements rest on values.

Check your understanding

Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.

A weekend cooking class costs 40 dollars. Taking it means 5 hours away from a delivery job that pays 12 dollars an hour, your best alternative (an illustrative example). What is the opportunity cost of the class, in dollars?
A community garden can grow these combinations of tomatoes and peppers in a season, in crates (an illustrative example, not real data): (0, 20), (1, 18), (2, 14), (3, 8), and (4, 0), tomatoes first. Find the peppers given up for each extra crate of tomatoes, and say whether the opportunity cost of tomatoes rises, falls, or stays the same.
For the same garden, classify the combinations (2, 10) and (3, 10) as on, inside, or outside the frontier, and explain each in one sentence.
Label each statement positive or normative and explain: (a) "A longer lunch break would raise the number of workers who eat a hot meal." (b) "Every workplace ought to offer a longer lunch break."

Answers (worked reasoning — read after attempting)

The money you pay is 40 dollars. The wages you give up are 5 × 12 = 60 dollars. The opportunity cost is 40 + 60 = 100 dollars. The class costs far more than its 40-dollar fee once your time counts.
From 0 to 1 crate of tomatoes the garden gives up 20 − 18 = 2 crates of peppers; from 1 to 2, 18 − 14 = 4; from 2 to 3, 14 − 8 = 6; from 3 to 4, 8 − 0 = 8. The cost climbs 2, 4, 6, 8, so the opportunity cost of tomatoes rises and this frontier bows outward.
At 2 crates of tomatoes the frontier gives 14 crates of peppers, so (2, 10) is inside: attainable, but 14 − 10 = 4 crates of peppers' worth of effort is wasted. At 3 crates of tomatoes the frontier gives only 8 crates of peppers, so (3, 10) is outside: it asks for 10 − 8 = 2 more crates than the garden can grow, so it is unattainable.
(a) Positive: it is a testable prediction. A workplace could count hot meals before and after a longer break. (b) Normative: "ought" signals a judgment about what is better, and people who agree on every fact can still disagree about it.

Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, and the quiz — and next week the comparative-advantage model turns this week's opportunity-cost rule into the reason trade helps both sides.

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