Economics begins with a simple problem: people want far more than the resources available can provide. Every household, firm and government must therefore choose, and every choice means giving something up. The Institute of Chartered Accountants of Nigeria (ICAN) syllabus opens its economics chapter with the vocabulary and the tools for thinking about that problem, and every later topic, from demand and supply to national income, rests on them.
This topic covers the definition of economics, its basic concepts, the two branches, the fundamental economic problems and the production possibility curve, and it ends with the difference between positive and normative economics. Learn the terms exactly, because short definition questions are common in the multiple-choice section.
In 30 seconds
Economics is the study of how people choose to use scarce resources that have alternative uses to satisfy unlimited wants. Scarcity forces choice, and the cost of any choice is the next best alternative given up, which is its opportunity cost. Every society must decide what, how, for whom and how much to produce.
A production possibility curve shows the combinations of two goods an economy can produce with all its resources fully used. Microeconomics studies individual units. Macroeconomics studies the economy as a whole.
What is economics?
The most widely used definition comes from the British economist Lionel Robbins: economics is the science that studies human behaviour as a relationship between ends and scarce means which have alternative uses. The ends are human wants, which we group as goods and services. The means are productive resources, also called factors of production. A community produces many goods and services by combining those resources in different ways.
Basic concepts
| Term | Meaning |
|---|---|
| Economy | A system for organising production, distribution, trade and consumption to meet human needs. We speak of the Nigerian economy, or of capitalist, socialist, mixed, developed and developing economies |
| Goods | Tangible things that satisfy wants, such as food, vehicles, footwear and machinery |
| Services | Intangible activities that satisfy wants, such as banking, teaching and transport |
| Economic good | A good that is scarce, so it has an opportunity cost. People want it but supply is limited |
| Non-economic (free) good | A good available without payment, such as air, sunshine or stream water |
| Utility | The satisfaction a person gets from consuming a good or service |
| Stock | A quantity measured at a point in time, with no time dimension, such as 1,000 bags of cement in a warehouse |
| Flow | A quantity measured over a period, such as a cement company’s production of 1,000 bags a day |
| Ceteris paribus | Latin for ‘all other things being equal’. It isolates the effect of one variable by holding the others constant |
| Rational behaviour | Economic agents, meaning consumers, firms and governments, do the best they can in the circumstances. A rational consumer prefers more to less and picks the basket of goods that gives the most value for the income available |
Factors of production
Resources can be combined in many ways to make the goods and services people want. They are grouped into four factors of production.
| Factor | What it is | Reward |
|---|---|---|
| Land (natural resources) | Gifts of nature: forests, fishing grounds, water, minerals, farmland, solar and hydroelectric potential | Rent |
| Labour (human resources) | Human effort, physical and mental, used in production | Wages |
| Capital | Man-made resources that help produce other goods: roads, dams, buildings and machinery | Interest |
| Entrepreneur | The person or owner-manager who organises the other factors to produce and sell, and who may innovate | Profit |
Microeconomics and macroeconomics
| Point | Microeconomics | Macroeconomics |
|---|---|---|
| Scope | Individual units: consumers, firms and industries | The economy as a whole |
| Studies | How resources are allocated and rewarded, and how relative prices are set. Consumer behaviour, production, pricing and wages | Aggregates: total output and income, employment, the money supply, government spending, taxation, investment and saving |
| Problems | Prices, costs, output and wages in a market | Unemployment, inflation, external imbalance, slow growth, poverty and inequality |
The basic economic problems
Scarcity
Scarcity exists because human wants are limitless while the resources to meet them are limited at any one time. It is the root of every economic problem. Because of it, every society must answer four questions.
- What to produce? Which goods and services, and in what quantities. More food or more technology? More resources for health or for education? Consumer demand, resource availability and government priorities shape the answer.
- How to produce? By which methods. Labour-intensive or capital-intensive? Conventional or sustainable techniques? Efficiency, cost, the environment and technology all matter.
- For whom to produce? Who receives the output and how it is shared. This depends on income, social policy and market mechanisms, and it raises questions of fairness.
- How much to produce? The scale of output that meets demand without waste or shortage. It involves forecasting demand and managing stocks.
Choice and the scale of preference
Scarcity forces choice: to get one thing, people give up another. A consumer chooses between goods and between spending now and later. A firm chooses what to make and how. A government, with a limited budget, chooses which public services to provide.
A scale of preference is a list of wants ranked by importance. It reflects the basic assumption that economic agents decide rationally.
Opportunity cost
Opportunity cost is the next best alternative given up when a choice is made. If a shopper has ₦200 and chooses a tin of rice rather than a tin of beans at the same price, the opportunity cost of the rice is the beans. It is also called the alternative forgone, actual cost or economic cost.
The idea matters because it helps people, firms and governments weigh the true cost of using scarce resources.
The production possibility curve
A production possibility curve (PPC) shows the different combinations of two goods that an economy can produce when all its resources are fully and efficiently used. Take an economy that can make only rice and butter.
| Combination | Rice (bags) | Butter (tins) | Butter given up for each extra bag of rice |
|---|---|---|---|
| A | 0 | 80 | Not applicable |
| B | 1 | 76 | 4 |
| C | 2 | 70 | 6 |
| D | 3 | 60 | 10 |
| E | 4 | 40 | 20 |
| F | 5 | 0 | 40 |
Reading the curve
- Scarcity. The curve is a boundary. The economy cannot produce more than it shows with its present resources.
- Full employment. Any point on the curve, A to F, uses all resources fully and efficiently.
- Unemployment or underemployment. A point inside the curve, such as G, means some resources are idle or underused.
- Unattainable. A point outside the curve, such as H, cannot be reached with the resources now available.
- Opportunity cost. The slope of the curve measures the opportunity cost of one good in terms of the other. It is also called the marginal rate of transformation. Moving from C to D gains one bag of rice and loses 10 tins of butter, so the third bag of rice costs 10 tins of butter.
- Economic growth. A steady rise in productive capacity shifts the whole curve outwards. The economy can then produce more of both goods.
The cost of each extra bag of rice rises from 4 tins to 40 tins. This is increasing opportunity cost. Resources are not equally good at making both goods, so the best rice land is used first and each further bag costs more butter.
Positive and normative economics
| Point | Positive economics | Normative economics |
|---|---|---|
| Concerned with | What is, was or will be | What ought to be |
| Nature | Objective. Statements can be tested against evidence | Subjective. Statements rest on value judgements |
| Example | If demand for a good rises and nothing else changes, its price will rise | The money supply should be cut to lower inflation |
Worked example: reading a production possibility table
Scenario. Use the rice and butter table above. (a) What is the opportunity cost of moving from combination D to combination E? (b) The economy actually produces 3 bags of rice and 30 tins of butter. What does that tell you? (c) New irrigation raises output of both goods. What happens to the curve?
- Part (a). Moving from D to E raises rice from 3 to 4 bags, a gain of 1 bag. Butter falls from 60 to 40 tins, a loss of 20. The opportunity cost of the fourth bag of rice is 20 tins of butter.
- Part (b). At 3 bags of rice, the curve allows 60 tins of butter. The economy makes only 30, so the point is inside the curve. Resources are unemployed or underused, and output could rise without any new resources.
- Part (c). More productive capacity moves the whole curve outwards. The economy can now produce more of both goods. This is economic growth.
Basic economics in more detail
Why scarcity forces choice: the logic
Wants are unlimited because as soon as one is met another appears. Resources are limited because land, labour, capital and enterprise exist in finite amounts at any time. When wants exceed resources, not every want can be met, so people must rank their wants and give up some. That is the origin of every economic decision. Even a very rich country faces the problem, because its wants are also unlimited.
Scarcity is not poverty. A free good such as air is not scarce, so no choice is needed about it.
Opportunity cost for a consumer, a firm and a government
| Decision-maker | Choice | Opportunity cost |
|---|---|---|
| Consumer | Spends ₦5,000 on a meal out | The next best use, such as a book or two weeks of transport |
| Firm | Uses a factory to make shoes | The profit from making bags there instead |
| Government | Builds a hospital with its budget | The school or road the money could have built |
Reading the production possibility curve in practice
On the rice and butter curve, moving from combination C to D gives up 10 tins of butter to gain one more bag of rice, so each bag now costs 10 tins. Moving from D to E costs 20 tins. The cost per bag rises because resources are not equally suited to both goods.
Farmland best for rice is used first, then land less suited, which yields less rice for each tin of butter given up. A concave curve shows this rising opportunity cost.
What shifts the curve
The curve shifts outward when the economy gains more resources, better quality resources (such as education and training), or better technology. It shifts inward after destruction of resources by war, disaster or a loss of workforce. A change that helps only one good, such as better fertiliser, pivots the curve along one axis only.
Economic systems: who answers the four questions
In a market economy prices and private choice answer what, how and for whom to produce. In a command economy the state decides. In a mixed economy, as in Nigeria, markets do most of the work and the government provides some services, regulates and redistributes. Each system has a way of handling scarcity, and each makes trade-offs between efficiency, freedom and fairness.
Positive and normative: practising the test
| Statement | Type | Reason |
|---|---|---|
| ‘Inflation in the country rose from 12% to 15% last year.’ | Positive | It can be checked against data |
| ‘The government should raise the minimum wage.’ | Normative | It says what ought to be done |
| ‘A rise in the price of fuel will raise transport costs.’ | Positive | A testable claim about cause and effect |
| ‘It is unfair that some people earn so much more than others.’ | Normative | A value judgement |
Common mistakes in the exam
- Defining economics as the study of money. Robbins’ definition is about scarce means with alternative uses.
- Calling opportunity cost the money spent. It is the next best alternative given up.
- Mixing stock and flow. A stock has no time period. A flow is measured over a period.
- Putting the production possibility curve in the wrong place. A point inside means unused resources. A point outside is unattainable.
- Calling a normative statement positive. If it says ‘should’ or ‘ought’, it is normative.
- Listing the four economic questions without explaining them.
Quick revision
- Economics: the relationship between unlimited ends and scarce means that have alternative uses.
- Factors of production: land, labour, capital and entrepreneur, with rent, wages, interest and profit as their rewards.
- Micro studies individual units. Macro studies aggregates such as output, employment and prices.
- Scarcity leads to choice and opportunity cost. Four questions: what, how, for whom, how much.
- PPC: on the curve means full employment, inside means unused resources, outside is unattainable, an outward shift is growth.
- Positive economics is about what is. Normative economics is about what ought to be.
Practice questions
These are original questions written in the style of the ICAN exam. Try each one before you open the answer.
Section A style: multiple choice
Question 1. Robbins defined economics as a science that studies the relationship between:
- Wealth and money
- Unlimited ends and scarce means that have alternative uses
- Income and national output
- Prices and profits
Show the answer
B. The ends are wants. The means are scarce productive resources with alternative uses.
Question 2. Which of the following is a non-economic good?
- Cement
- Air
- Rice
- Fuel
Show the answer
B. Air. It is free and available without payment, so it has no opportunity cost.
Question 3. Which of the following is a flow?
- 1,000 bags of cement stored in a warehouse
- A company’s production of 1,000 bags of cement a day
- The balance in a savings account on 31 December
- The number of vehicles parked at a depot at noon
Show the answer
B. Daily production is measured over a period. The other options are quantities at a point in time, which are stocks.
Question 4. Opportunity cost is:
- The money spent on a good
- The next best alternative given up when a choice is made
- Total cost divided by output
- The cost that does not change with output
Show the answer
B. It measures what is lost by choosing one option over the next best.
Question 5. A point inside the production possibility curve indicates:
- An unattainable level of output
- Full employment of resources
- Unemployed or underused resources
- Economic growth
Show the answer
C. The economy could produce more with the resources it has. A point outside the curve is unattainable, and a point on it is full employment.
Question 6. ‘The money supply should be reduced to lower the inflation rate’ is an example of:
- Positive economics
- Normative economics
- A stock
- A ceteris paribus assumption
Show the answer
B. Normative economics. It says what should be done, which is a value judgement.
Question 7. A country can produce at a point inside its production possibility curve when:
- It has full employment
- Some resources are unemployed or underused
- It has more resources
- It has grown
Show the answer
B. Inside the curve means idle resources.
Question 8. An outward shift of the production possibility curve can be caused by:
- A war
- Better technology
- Falling employment
- Loss of resources
Show the answer
B. Technology raises capacity.
Question 9. Which of these is a positive statement?
- The government ought to cut taxes
- Unemployment rose to 5% last year
- Fuel is too dear
- Wages should be higher
Show the answer
B. It is a fact that can be tested.
Question 10. The reward of the factor of production called capital is:
- Rent
- Wages
- Interest
- Profit
Show the answer
C. Land earns rent, labour wages and the entrepreneur profit.
Section B style: written questions
Question 11 (10 marks). Explain the four fundamental questions every economy must answer, and say why they arise.
Show the marking guide
Why they arise (2 marks). Human wants are unlimited, resources are scarce, so choices must be made.
The four questions (8 marks, 2 each: 1 for the question, 1 for explanation). What to produce: which goods and services and in what quantities. How to produce: the methods, such as labour-intensive or capital-intensive. For whom to produce: how output is shared among groups. How much to produce: the scale of output that meets demand without waste or shortage.
Question 12 (20 marks). An economy can produce combinations of rice and butter as follows:
- A, 0 bags and 80 tins
- B, 1 bag and 76 tins
- C, 2 bags and 70 tins
- D, 3 bags and 60 tins
- E, 4 bags and 40 tins
- F, 5 bags and 0 tins
(a) Define opportunity cost and calculate the opportunity cost of each additional bag of rice from B to F. (6 marks)
(b) Explain what is meant by a point inside the curve, a point outside the curve, and an outward shift of the curve. (8 marks)
(c) Distinguish between positive and normative economics, with one example of each. (6 marks)
Show the marking guide
(a) 6 marks. Opportunity cost is the next best alternative given up (2). Butter given up: B, 4 tins; C, 6; D, 10; E, 20; F, 40 (4, one for each pair of points, with a note that the cost rises).
(b) 8 marks, 2 each plus 2 for linking. A point inside the curve: unemployed or underused resources. A point outside: unattainable with present resources. An outward shift: growth in productive capacity, so more of both goods can be produced. Link to scarcity and the idea that a point on the curve means full employment (2).
(c) 6 marks. Positive economics deals with what is and can be tested (2). Normative economics deals with what ought to be and rests on value judgements (2). One example of each (2).
A further written question
Question 13 (10 marks). Explain the concept of opportunity cost with examples for a consumer, a firm and a government.
Model answers
Show the model answer to Question 11
Every society must answer four questions because wants are unlimited and resources are scarce. What to produce: which goods and services and in what quantities, for example food or technology, health or education. How to produce: the methods used, such as labour-intensive or capital-intensive techniques, with efficiency, cost and the environment as factors.
For whom to produce: how the output is shared among people and groups, which depends on income, policy and market mechanisms and raises questions of fairness. How much to produce: the scale of output that meets demand without waste or shortage. The questions arise because scarcity forces choice. Without choice among competing uses of resources, there would be no economic problem.
Show the model answer to Question 12
(a) Opportunity cost. It is the next best alternative given up when a choice is made. Moving from B to C, one more bag of rice costs 6 tins of butter (76 − 70). From C to D it costs 10 tins, from D to E 20 tins, and from E to F 40 tins. The cost per bag rises, which is increasing opportunity cost, because resources are not equally good at making both goods.
(b) Meaning of the curve. A point inside the curve shows that some resources are unemployed or underused, so output could rise with no new resources. A point outside the curve is unattainable with the present resources. An outward shift shows economic growth: more resources, better quality or better technology allow more of both goods to be produced. A point on the curve means full and efficient use of resources.
(c) Positive and normative. Positive economics deals with what is, was or will be. Its statements can be tested against evidence, for example ‘a rise in the price of a good reduces the quantity demanded’. Normative economics deals with what ought to be and rests on value judgements, for example ‘the government should reduce inflation by cutting the money supply’.
Show the model answer to Question 13
Opportunity cost is the value of the next best alternative that is given up when a choice is made. It arises because resources are scarce and have alternative uses. For a consumer with ₦5,000, buying a meal out means giving up the next best use, such as a book.
For a firm that uses a factory to make shoes, the opportunity cost is the profit it could have made by making bags in the same factory. For a government that spends its budget on a hospital, the opportunity cost is the school or road that the money could have built. The concept helps decision-makers weigh the true cost of using scarce resources, which is more than the money price.
Pathfinder on introduction to economics
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Neither the May Diet, 2026 nor the November Diet, 2025 has a written question on this topic, so practise it through the multiple-choice questions. Check Section A of every diet for items on scarcity, opportunity cost, the production possibility curve and positive versus normative economics.
Revise first: The production possibility curve
Source: ICAN Pathfinder, Business Environment. Diets covered: May Diet, 2021 to May Diet, 2026. November Diet, 2024 is not yet mapped.
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