Needs, wants and opportunity cost

You have ₹100 of pocket money. Snacks today, or save it towards new shoes? Your school library has 5 copies of a new storybook but 20 pupils want it: who reads it first? A farmer must choose a crop; a company must choose between more workers or more machines; the government must choose between highways and hospitals. All of these are economic choices.

First, sort what you want into two boxes:

• Needs: things you cannot live without: food, water, shelter.
• Wants: things that are nice to have: gadgets, holidays, luxury items.

"Why do wants never end?" Watch them climb a staircase: first you want a bicycle. Once you have it, you want a motorbike. Then a car. Each want, once met, is replaced by a bigger one. That is what the book means: human wants are unlimited and keep changing.

To meet needs and wants we use resources: things used to produce goods and services. Some are natural (water, coal); some are human-made (capital, technology). In Grade 8 you met the factors of production: land, labour, capital and technology.

Here is the problem: resources are limited, and each can be used in different ways. Steel can make medical equipment, aircraft or refrigerators (Fig. 8.2), but the same steel cannot make all three. Unlimited wants and limited resources together create scarcity (kami).

Scarcity forces a choice. And every choice has a hidden price. If you spend your ₹100 on a burger, you give up the ice cream you could have had. The value of the best option you gave up is called the opportunity cost.

Watch out: opportunity cost is not the price you paid. It is the next-best thing you gave up. If you have ₹100 and choose a notebook over saving for a tennis racket, the opportunity cost of the notebook is the racket savings.

"Is time scarce too?" Yes. You have two free hours: a TV show or study? An hour spent on one is an hour you cannot spend on the other.

The farmer's choice (p.185). A farmer has limited land, water and labour, and can grow barley and wheat. Here are the possible combinations:

Read it as a story of choices: "I could grow only wheat, 100 kg. Or 25 kg barley and 90 kg wheat. Or 50 and 70..." Each extra 25 kg of barley costs some wheat.

Plot these points on a graph, barley on the x-axis and wheat on the y-axis, and you get a downward-sloping curve: the Production Possibility Curve (PPC) (Fig. 8.3). Moving from A towards E means more barley, less wheat. The wheat given up is the opportunity cost of the extra barley.

Every point on the curve shows the most the farmer can grow when resources are used fully, without waste. That is why the PPC helps enterprises and governments plan.