1.1 Meaning of Economics
Economics is a social science that studies how individuals, households, firms, and governments make choices on the allocation of scarce resources in order to satisfy unlimited human wants.
Different economists have defined economics in their own way:
- Adam Smith (1776), regarded as the father of economics, defined it as the study of wealth – how wealth is produced and distributed. His definition was criticized for being too materialistic.
- Alfred Marshall (1890) defined economics as a study of mankind in the ordinary business of life. He emphasized human welfare rather than wealth.
- Lionel Robbins (1932) provided the most widely accepted definition: Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
From Robbins’ definition, three key ideas emerge:
- Human wants (ends) are unlimited.
- Resources (means) are limited.
- These resources can be used in different ways (alternative uses).
Therefore, economics is about making choices because scarcity forces individuals and societies to decide how best to use their resources.
1.2 Scarcity and Choice
Scarcity
Scarcity means that resources such as land, labour, capital, and entrepreneurship are limited in supply relative to the unlimited wants of people. For example, Nigeria has large oil reserves, but they are not enough to satisfy all the infrastructural, educational, and healthcare needs of the country at once.
Choice
Because of scarcity, individuals and societies must make choices. Choosing one thing often means sacrificing another. For example, if a student chooses to spend money on textbooks, he or she may have to postpone buying new clothes.
1.3 Scale of Preference and Opportunity Cost
Scale of Preference
A scale of preference is a list of wants arranged in order of priority or importance. Since resources are scarce, individuals must rank their wants.
Example:
A student has ₦10,000 and lists the following wants:
- Pay school fees (₦6,000)
- Buy textbooks (₦3,000)
- Buy snacks (₦2,000)
- Purchase shoes (₦5,000)
With ₦10,000, the student can only satisfy wants (1) and (2). Wants (3) and (4) will be forgone. The arrangement shows the scale of preference.
Opportunity Cost
Opportunity cost is the value of the next best alternative forgone when a choice is made. It is sometimes called the real cost of a decision.
Example:
If a farmer uses his land to plant maize instead of cassava, the opportunity cost of the maize is the cassava that could have been produced.
1.4 The Production Possibility Curve (PPC)
The PPC is a graphical representation of the maximum possible combinations of two goods that an economy can produce with its available resources and technology, assuming full and efficient use.
- Points on the curve represent efficient use of resources.
- Points inside the curve show underutilization of resources.
- Points outside the curve are unattainable with the current resources.
Example:
If an economy can produce either 100 units of rice or 50 units of beans, the PPC will show the different combinations possible (e.g., 80 rice and 20 beans, 60 rice and 30 beans, etc.). Moving along the curve illustrates the concept of opportunity cost.
1.5 Economic Activities: Production, Distribution, and Consumption
- Production
This is the creation of goods and services to satisfy human wants. It involves combining factors of production (land, labour, capital, and entrepreneurship). - Distribution
This refers to how the goods and services produced are shared among individuals, households, firms, and the government. Distribution also includes income distribution – wages, rent, interest, and profit. - Consumption
This is the process of using goods and services to satisfy human wants. For example, eating food, wearing clothes, or using a smartphone are acts of consumption.
1.6 Classification of Economic Activities
Economic activities are grouped into three broad sectors:
- Primary Activities
These involve the direct use of natural resources, e.g., farming, fishing, mining, forestry.- Contribution: They provide food, raw materials, and employment.
- Secondary Activities
These involve processing raw materials into finished or semi-finished goods, e.g., manufacturing, construction, oil refining.- Contribution: They increase value, promote industrialization, and create jobs.
- Tertiary Activities
These are services that support production and consumption, e.g., transport, banking, insurance, communication, trade, and education.- Contribution: They facilitate distribution, create employment, and boost foreign exchange through services like tourism.
1.7 Relative Contributions of Sectors
In most developing countries such as Nigeria:
- Primary sector contributes significantly to employment and foreign exchange earnings (e.g., agriculture and crude oil).
- Secondary sector is growing but still limited compared to developed countries.
- Tertiary sector is expanding rapidly due to urbanization, banking, ICT, and trade.
In developed countries, the tertiary sector dominates, while the primary sector contributes less to national output and employment.
Key Points to Master for Examination
- Definitions of Economics – Wealth (Adam Smith), Welfare (Alfred Marshall), Scarcity & Choice (Lionel Robbins).
- Scarcity and Choice – Scarcity means limited resources, choice is necessary because of scarcity.
- Scale of Preference – Wants arranged in order of priority; practical examples expected.
- Opportunity Cost – The value of the next best alternative forgone; students must give correct examples.
- Production Possibility Curve (PPC) – Graph that shows scarcity, choice, and opportunity cost; must be able to draw and interpret.
- Economic Activities – Production, Distribution, and Consumption.
- Classification of Economic Activities – Primary (farming, mining), Secondary (manufacturing, refining), Tertiary (services).
- Sectoral Contributions – Compare developing vs developed countries in terms of output, employment, savings, investment, and foreign exchange.
Section A: Objective Questions (20)
Instruction: Answer all questions. Choose the most appropriate option.
- The main concern of economics is:
a) Money supply
b) Human wants and scarcity
c) Employment only
d) Population growth - According to Lionel Robbins, economics is concerned with:
a) Wealth of nations
b) Production of goods only
c) Scarcity and choice
d) Political decisions - The term “scale of preference” means:
a) A list of items in the market
b) A budget of income and expenditure
c) A list of wants arranged in order of priority
d) A government policy on trade - The opportunity cost of a choice is:
a) The cost of producing the good
b) The money spent on the good
c) The next best alternative forgone
d) The sum of all alternatives available - A point inside the production possibility curve represents:
a) Full employment of resources
b) Under-utilization of resources
c) Over-utilization of resources
d) Efficient allocation of resources - The basic economic problem is caused by:
a) Corruption
b) Scarcity of resources
c) Inflation
d) International trade - Which of the following is a primary activity?
a) Banking
b) Farming
c) Road transport
d) Telecommunications - Which sector dominates in developed economies?
a) Primary
b) Secondary
c) Tertiary
d) Informal - If a farmer has land that can be used for yam or maize, but he chooses yam, the opportunity cost is:
a) The yam harvested
b) The money from yam sales
c) The maize he did not plant
d) The fertilizer applied - The concept of choice arises because:
a) Wants are unlimited, resources are limited
b) Government controls production
c) Consumers prefer imported goods
d) Production is always efficient - Production, distribution, and consumption are:
a) Economic activities
b) Financial institutions
c) Agricultural activities
d) Statistical tools - A country operating on its PPC is:
a) Inefficient
b) Utilizing resources fully
c) Experiencing inflation
d) Facing unemployment - Which of the following best defines economics?
a) The study of human behaviour in relation to scarce resources
b) The study of political institutions
c) The study of trade unions and employers
d) The study of how banks make profit - The fundamental reason why we cannot satisfy all wants is:
a) Wants are not measurable
b) Resources are scarce
c) Government is corrupt
d) Population is declining - In a developing economy, which sector provides the highest employment?
a) Primary
b) Secondary
c) Tertiary
d) Quaternary - A country that shifts its PPC outward has achieved:
a) Scarcity
b) Economic growth
c) Unemployment
d) Inflation - The satisfaction derived from consuming a good is called:
a) Utility
b) Value
c) Opportunity cost
d) Choice - Which of the following is NOT a tertiary activity?
a) Insurance
b) Banking
c) Mining
d) Transportation - Distribution in economics refers to:
a) The process of selling goods to customers
b) The allocation of income among factors of production
c) Movement of raw materials from farm to factory
d) Storage of goods in warehouses - In Nigeria, crude oil belongs to which sector of the economy?
a) Primary
b) Secondary
c) Tertiary
d) Informal
(Answers: 1b, 2 c, 3 c, 4 c, 5 b, 6 b, 7 b, 8 c, 9 c, 10 a, 11 a, 12 b, 13 a, 14 b, 15 a, 16 b, 17 a, 18 c, 19 b, 20 a.)
Section B: Essay/Structured Questions (10 with Detailed Answers)
Question 1
Define economics and explain three major definitions given by economists.
Answer:
Economics is the social science that studies how individuals and societies allocate scarce resources to satisfy unlimited wants.
- Adam Smith: Defined economics as the study of wealth – its production and distribution.
- Alfred Marshall: Defined economics as the study of mankind in the ordinary business of life, emphasizing welfare rather than wealth.
- Lionel Robbins: Defined economics as the science of human behaviour as a relationship between ends and scarce means which have alternative uses, highlighting scarcity and choice.
Question 2
Explain the concepts of scarcity and choice with suitable examples.
Answer:
- Scarcity: Limited supply of resources relative to unlimited wants. Example: Nigeria has limited resources to provide free education, healthcare, and infrastructure at the same time.
- Choice: Because resources are scarce, individuals must decide which wants to satisfy. Example: A student with ₦5,000 may choose between buying textbooks or new shoes. Choosing textbooks means shoes are forgone.
Question 3
What is scale of preference? Illustrate with a practical example.
Answer:
Scale of preference is the arrangement of wants in order of priority or importance.
Example: A student with ₦3,000 lists his wants as follows:
- Pay exam fee ₦2,000
- Buy textbooks ₦1,000
- Buy snacks ₦500
With ₦3,000, the student satisfies (1) and (2). Snacks are left out. This arrangement is the scale of preference.
Question 4
Define opportunity cost and explain its importance.
Answer:
Opportunity cost is the value of the next best alternative forgone when a choice is made.
Importance:
- Helps individuals make rational decisions.
- Helps governments allocate scarce resources effectively (e.g., road vs hospital projects).
- Helps producers choose between alternative methods of production.
Question 5
Explain the Production Possibility Curve (PPC) and draw a well-labelled diagram.
Answer:
PPC shows the maximum combinations of two goods that can be produced using available resources and technology.
- Points on the curve = efficient production.
- Points inside = underutilization.
- Points outside = unattainable with current resources.
(Students must draw a concave curve with proper labeling of axes and points A, B, C, etc.)
Question 6
Differentiate between production, distribution, and consumption with examples.
Answer:
- Production: Creating goods and services, e.g., a farmer growing rice.
- Distribution: Sharing goods and incomes, e.g., wages paid to workers.
- Consumption: Using goods and services, e.g., eating rice.
Question 7
Classify economic activities into three sectors and state two contributions of each to Nigeria’s economy.
Answer:
- Primary sector: Farming, fishing, mining. Contributions: food, foreign exchange.
- Secondary sector: Manufacturing, construction. Contributions: adds value, creates jobs.
- Tertiary sector: Banking, transport, insurance. Contributions: supports trade, provides services.
Question 8
With examples, explain how scarcity leads to opportunity cost.
Answer:
Scarcity means resources are insufficient to meet all wants. Choosing one option requires giving up another.
Example: A government with limited funds may build a hospital instead of a stadium. The opportunity cost of the hospital is the stadium forgone.
Question 9
Compare the contributions of primary, secondary, and tertiary sectors in developing and developed countries.
Answer:
- In developing countries (e.g., Nigeria), primary sector dominates in employment and foreign exchange, secondary sector is small, tertiary is growing.
- In developed countries (e.g., USA), tertiary sector dominates, secondary is strong, primary contributes very little.
Question 10
Why is economics called a science of scarcity and choice?
Answer:
Because:
- Resources are scarce and cannot meet unlimited human wants.
- This compels individuals and societies to make choices.
- Economics studies how these choices are made and their consequences.