Meaning of Economics

One of the most quoted definitions of Economics today is perhaps, “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”. This Definition was given by Lionell Robbins in 1935.

If we put in simple words, Economics is the study of human bahaviour in relation to their wants. It studies how human beings manage their scare resources in trying to satisfy their wants.


Scarcity means limitation of the availability of resources in relation to their wants. That means the available resources are not enough to completely satisfy all the wants.

By now, you must have already learnt that human beings have unlimited wants. And as the resources with which these wants must be satisfied are limited, we can understand that ‘scarcity’ is the central economic problem of everyone including individuals, firms and the government, and even the whole world.

Opportunity Cost

If we decide and choose which want to satisfy with the available resource, then there are other wants we have to leave unsatisfied. We have to forgo something in order to satisfy a want. The want that is forgone is called the ‘opportunity cost’. It is also known as ‘the next best alternative’.

Inevitability of choices at all levels

The existence of scarcity forces people, firms, and societies to choose some of their wants that can be satisfied and other wants to be left unsatisfied. Economics helps us to make wise choices to achieve the highest possible satisfaction. Hence, economics is a science of making best choices in order to satisfy our needs and wants.

Where there is scarcity, there is choice, and every choice has its opportunity cost. If there is no scarcity, there is no choice and no opportunity cost, i.e., free goods.

  • Choice means selection of something for consumption or production. Every “choice” is accompanied by opportunity cost.
  • Opportunity cost is the benefit of the next best alternative sacrificed due to the current choice having been made.


At an individual level: An individual faces the basic economic problem if he has ₦200 and wants to buy a Bigi cola and chips with prices of ₦150 and ₦100, respectively. He is unable to buy both due to his limited income; hence, is forced to make a choice. If he chooses Bigi cola, the benefit he could have from consumption of chips is his opportunity cost.

At a firm’s level: A firm may have to choose either an advertising campaign or instalment of new machinery in the factory because it does not have enough resources to do both. Choice of advertising campaign will have the opportunity cost of new machinery.

At the government level: A society may face basic economic problem when it does not find enough resources to develop a school network in rural areas as well as wants to strengthen its defense system. Choice of strong national defense will lead to the sacrifice of the benefit she could have from improved education.

  • Opportunity Cost is even present between the choice of present or future. 
  • If a society chooses high standard of living in future, it must invest more today to reap high in future. More investment today means less consumption and lower standard of living in the present.
  • Present consumption is the opportunity cost of investment and better future living standards. 

The basic economic questions

There are some basic questions faced by every society. How they are answered depends largely on the type of economic system the country has. The questions are:

  1. What to produce?
  2. How to produce?
  3. For whom to produce?
  1. What to produce? This mainly depends on consumers in a free market. The consumers choose the product they like and thus their choices direct the types of production that should be carried out. The firms will follow this because this is the most profit maximizing combination. Sometimes the government too can decide what to produce. The government may decide to produce an essential good or service which everyone ought to have.
  2. How to produce? This question will be answered by those supplying the goods and services. If the supplier is a private firm, it will seek to use the method which will give the maximum profit. For example, production can be done using labour intensive method and capital intensive method. The private firm will decide on the method which will give lowest average costs.
    If the government is the supplier, it may try to use the method which promotes welfare of the society rather than maximising the profit.
  3. For whom to produce? For whom to produce will also depend on the suppliers (government and private firms). The consumers are the target of production, but the kind of consumers the firm or the government wants to target is the question. The government usually produces for the general public where as the private firms can seek to maximize profit by producing for the high and rich level customers as well as the general public. In simple words, the production is done for those who are willing to pay.

Note: among the suppliers, there will also be private individuals(sole traders). Their objective in production is the same as that of the private firms – that is, to maximise profit.

Short Run. Long Run.. Very Long Run…

short run, long run and very long run

Short Run

  • In the short run one factor of production is fixed, e.g. capital. This means that if a firm wants to increase output, it could employ more workers, but not increase capital in the short run (it takes time to expand.)
  • Also, in the short run, we can see prices and wages out of equilibrium, e.g. a sudden rise in demand, may lead to higher prices, but firms don’t have the capacity to respond and increase supply.

Long run

The long run is a situation where all main factors of production are variable. The firm has time to build a bigger factory and respond to changes in demand. In the long run:

  • Firms can enter or leave a market.
  • Prices have time to adjust.
  • The long run may be a period greater than six months/year

Very Long Run

The very long run is a situation where technology and factors beyond the control of a firm can change significantly, e.g. in the very long run:

  • New technology may make current working processes outdated, e.g. rise of the internet usage has increased the way people interact in this present age making it easy to communicate with someone not considering the location.
  • Government policy may change, e.g. granting subsidies to firms to boost employment and productivity.
  • Social customs: For example, the acceptance of implants and body surgeries to improve body image which has changed women’s perception about themselves.

Ceteris Paribus

This commonly-used phrase stands for ‘all other things being equal’. It is used in economics to rule out the possibility of ‘other’ factors changing. It means that most of the time, something will occur as a result of something else. That is, of course, if nothing else changes. 

In Economics, this concept allows you to imagine a situation where only two variables change. You can focus on how a change in the independent variable affects the dependent variable. For example with the law of demand which states that ”if demand drops, ceteris paribus, then the prices will fall to meet demand”. This informs you that there are only two variables which are price and demand, when demand drops, all things being equal prices too will drop.

Note: In the real world, all other things are never equal. But using the concept of ceteris paribus allows you to understand the theoretical relationship between cause and effect.

Decisions at the Margin

Like ceteris paribus, this is another tool that is used by economists to simplify a situation. Many aspects of microeconomics involve analyzing decisions at the margin’. By this we mean that a small change in one economic variable will lead to further (small) changes in other variables.

Decision making characterized by weighing the additional (marginal) benefits of a change against the additional (marginal) costs of a change with respect to current conditions.

According to economists, for most decisions, you think in terms of additional, or marginal, costs and benefits, not total costs and benefits. That’s because most decisions deal with making a small, or additional, change.

To illustrate, suppose you just finished eating a burger and drinking a soda for lunch. You are still a little hungry and are considering whether or not to order another burger. An economist would say that in deciding whether or not to order another burger, you will compare the additional benefits of the additional burger to the additional costs of the additional burger. In economics, the word marginal is a synonym for additional. So we say that you will compare the marginal benefits of the (next) burger to the marginal costs of the (next) burger. If the marginal benefits are greater than the marginal costs, you obviously expect a net benefit to ordering the next burger, and therefore, you order the next burger. If, however, the marginal benefits are less than the marginal costs, you obviously expect a net cost to ordering the next burger, and therefore, you do not order the next burger.

What you don’t consider when making this decision are the total benefits and total costs of burgers. That’s because the benefits and costs connected with the first burger (the one you have already eaten) are no longer relevant to the current decision. You are not deciding between eating two burgers and eating no burgers; your decision is whether to eat a second burger after you have already eaten a first burger.