Source: Intro to Microeconomics, University of Texas at Austin, Unit 1 lecture notes
Tags: scarcity, economics, microeconomics, macroeconomics, opportunity cost, marginal analysis, factors of production, positive statements, normative statements
Difficulty: Introductory | Prerequisites: None. This is the opening unit of the course.
Economics begins with a simple observation: people want more than they can have. This unit lays the groundwork for the entire microeconomics course by introducing the core problem (scarcity), the framework economists use to think about it (marginal analysis, opportunity cost), and the systems societies have built to deal with it (command, free market, mixed). If you missed the first few weeks, start here. Everything that follows in the course, from supply and demand to market structures, rests on the vocabulary and logic covered in this unit.
Economics is the study of how individuals and societies allocate scarce resources. Because wants are unlimited and resources are not, every choice involves a trade-off, and the true cost of any decision is the next-best alternative you gave up (opportunity cost). Economists analyse these decisions at the margin, comparing the additional benefit of one more unit against its additional cost.
Scarcity
The condition that arises because society has unlimited wants but only limited resources to satisfy them. In simple terms, this means you cannot have everything you want, so you have to choose.
Economics
The social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants. Think of it as the study of how people decide what to do with what they have.
Microeconomics (micro)
The branch of economics that studies individual economic units: consumers, firms, and specific markets. In simple terms, it zooms in on one market, one firm, or one household at a time.
Macroeconomics (macro)
The branch of economics that studies the economy as a whole, including aggregates such as national output, unemployment, and inflation. Think of it as the wide-angle view.
Theoretical economics
The use of the scientific method to develop models and theories that explain economic behaviour. Think of it as building the toolkit.
Policy economics
The application of economic theories to solve real-world problems or achieve economic goals. Think of it as using the toolkit.
Positive statement
A factual, testable claim about the world that avoids value judgements. It describes what is or what will happen. Example: "The unemployment rate is 4%." In simple terms, it is a statement you can check with data.
Normative statement
A statement that includes a value judgement about what ought to be. Example: "The government should reduce unemployment." Think of it as an opinion, however well-informed.
Marginal analysis
A decision-making framework that evaluates choices by comparing the additional (marginal) benefit of one more unit against its additional (marginal) cost. In simple terms, it asks: "Is the next one worth it?"
Market
Any arrangement that brings buyers and sellers together to exchange goods, services, or resources. It does not have to be a physical place.
Cost (in economics)
The full cost of a decision, including both the direct monetary expense and the opportunity cost. This is broader than the everyday meaning of "price."
Capital (in economics)
Human-made tools, machinery, and equipment used to produce goods and services. In a finance class capital means money; in economics it means the physical stuff used to make other stuff.
Marginal cost
The extra expense a business incurs to produce one additional unit of a good or service.
Factors of production
The four categories of resources used to produce goods and services: land, labour, capital, and entrepreneurship.
Land
All natural resources used in production, such as water, minerals, and timber.
Labour
The human effort, both physical and mental, applied to production.
Physical capital
Human-made resources (tools, machines, buildings) used to create goods and services.
Human capital
Skills, knowledge, and experience gained through education and training that make workers more productive.
Entrepreneurship
The ability to organise, innovate, and take risks in combining the other factors of production to create goods and services.
Utility
The satisfaction or benefit a consumer derives from consuming a good or service.
Sunk cost
A cost that has already been incurred and cannot be recovered. It should not influence future decisions. Think of it as money already spent, gone either way.
Economics is the study of choices under scarcity.
It asks how individuals, firms, and governments allocate limited resources to satisfy unlimited wants.
The field splits into two lenses:
Microeconomics examines individual units: a single consumer, a single firm, a single market. Topics include supply and demand in specific industries, production costs, labour markets, and regulation.
Macroeconomics examines the economy as a whole: total output, unemployment, inflation, and fiscal or monetary policy.
Economists follow the scientific method: observe, hypothesise, test, revise.
Theoretical economics builds models and theories from data.
Policy economics applies those theories to real-world problems and goals.
Two types of statements matter here:
Positive statements are factual, testable claims. They describe what is. Example: "When the price of petrol rises, people drive less."
Normative statements involve value judgements. They describe what ought to be. Example: "The government should subsidise public transport."
Scarcity is universal. Society has unlimited wants and limited resources.
Every choice has a trade-off. Choosing one thing means giving up something else.
People act in their self-interest. Individuals aim to maximise their own satisfaction (utility).
Decisions are made at the margin. People compare the marginal benefit and marginal cost of each additional unit before deciding.
Models simplify reality. Economists use graphs and simplified models (such as cost-benefit analysis) to explain real-life situations.
Marginal analysis is the method of evaluating decisions one increment at a time.
The rule: keep doing something as long as the marginal benefit is greater than or equal to the marginal cost.
When the marginal cost exceeds the marginal benefit, stop.
This applies to consumers (should I buy one more coffee?), firms (should I produce one more unit?), and governments (should I fund one more programme?).
Market: In everyday language, a physical shop. In economics, any arrangement that brings buyers and sellers together, including online platforms and informal exchanges.
Cost: In everyday language, the price you pay. In economics, cost includes both the direct expense and the opportunity cost.
Capital: In finance, money. In economics, the physical tools, equipment, and machinery used for production.
Marginal: In everyday language, small or insignificant. In economics, it means "one more unit" or "additional."
Every economy uses four categories of resources to produce goods and services:
Land – all natural resources (water, minerals, forests, oil).
Labour – the workforce; the physical and mental effort people contribute.
Physical capital – human-made tools, machines, and infrastructure.
Human capital – the skills, knowledge, and training workers accumulate.
Entrepreneurship – the ability to organise land, labour, and capital, take risks, and innovate. Examples from the notes include figures like Elon Musk and Henry Ford.
Marginal analysis is how a café owner decides whether to stay open an extra hour: if the revenue from that hour exceeds the cost of staffing and electricity, it is worth it. The moment costs overtake revenue, closing is the rational call.
The distinction between explicit and implicit costs is why some profitable-looking businesses still fail. A shop owner who earns £30,000 a year but could earn £50,000 as an employee elsewhere is, in economic terms, making a loss: the implicit cost of forgone wages exceeds the accounting profit.
Students often confuse scarcity with shortage. Scarcity is permanent (unlimited wants, limited resources). A shortage is temporary (quantity demanded exceeds quantity supplied at a given price) and can be resolved.
Students sometimes think opportunity cost means all the things you gave up. It does not. Opportunity cost is only the single next-best alternative, not the entire list of trade-offs.
Sunk costs frequently trip students up. A sunk cost is irrelevant to future decisions, yet students (and people generally) keep factoring it in. "I already paid for the ticket" is not a reason to attend an event you no longer want to go to.
Capital in economics is not money. Students coming from a finance or business background often conflate the two. In economics, capital refers to physical tools and equipment.
⚠️ The five key economic assumptions are a staple exam topic. Be able to list and briefly explain all five.
⚠️ Positive vs. normative statements: expect multiple-choice questions asking you to classify a statement as one or the other. The test word is "should" or "ought" (normative) vs. a testable factual claim (positive).
⚠️ Opportunity cost questions often appear as scenarios: "If you choose X, what is the opportunity cost?" The answer is always the single best alternative you did not choose.
⚠️ Know the four factors of production and be able to give an example of each. Entrepreneurship is the one students most often forget.
⚠️ Marginal analysis: the decision rule (continue as long as MB ≥ MC; stop when MC > MB) is tested in calculation and scenario questions.
True or false: Scarcity means that a good is unavailable. (False. Scarcity means wants exceed available resources, not that a good is completely absent.)
Fill in the blank: A statement that includes a value judgement about what ought to be is called a ______ statement. (Normative.)
True or false: Opportunity cost includes all the alternatives you gave up. (False. It is only the single next-best alternative.)
Fill in the blank: The four factors of production are land, labour, ______, and entrepreneurship. (Capital.)
True or false: A sunk cost should be considered when making future decisions. (False. Sunk costs are irrecoverable and should not influence future choices.)
Q: Define scarcity and explain why it is the fundamental problem in economics.
A: Scarcity is the condition that arises because society has unlimited wants but only limited resources. It is the fundamental problem because it forces individuals, firms, and governments to make choices about how to allocate those resources.
Q: What is the difference between a positive statement and a normative statement? Give one example of each.
A: A positive statement is a factual, testable claim (e.g., "Raising the minimum wage will reduce employment among teenagers"). A normative statement involves a value judgement about what should happen (e.g., "The government should raise the minimum wage").
Q: A student has two hours free. She can study for her economics exam or work a shift that pays $20/hour. She decides to study. What is her opportunity cost?
A: The opportunity cost is the $40 she could have earned working the two-hour shift, because that is the value of her next-best alternative.
Q: List the four factors of production and give one example of each.
A: Land (timber), labour (factory workers), capital (machinery), entrepreneurship (a business founder who organises the other three resources).
Q: Explain the marginal decision rule. When should a rational decision-maker stop an activity?
A: A rational decision-maker should continue an activity as long as the marginal benefit is greater than or equal to the marginal cost. The activity should stop when the marginal cost exceeds the marginal benefit.
This material connects directly to Unit 2 (supply and demand), where scarcity drives the behaviour of buyers and sellers in a market. The concept of opportunity cost returns in the production possibilities curve, which is covered in the second document of these notes.
Marginal analysis becomes the backbone of consumer theory (utility maximisation) and producer theory (profit maximisation) later in the course. The factors of production reappear when you study costs of production and labour markets.
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