What economics is: scarcity, choice and opportunity cost

What this chapter is for

This is the first chapter of the theory paper, and every later chapter rests on it. It teaches the one problem that economics exists to study. People want more than they can have, so they have to choose, and every choice gives something up. You will meet that problem in one family’s month, then in the definition economists use, then on one farmer’s ten acres, drawn as the curve that every Economics paper expects you to draw. You will see how whole countries answer the same problem, what the subject’s two halves are, the difference between a statement of fact and a statement of opinion, and why economists say “other things being equal”. The chapter ends with Pakistan’s own budget for 2026-27, which is a lesson in scarcity written in billions of rupees.

FPSC asks about this ground directly. CE-2026 opened its theory questions with “Scarcity leads to economic choices” and asked for a graph and an example from your own life. CE-2024 asked why economists use the ceteris paribus assumption. CE-2023 asked you to define opportunity cost. The chapter is long, so here is its map. Sections 1 to 3 teach scarcity, the definition and opportunity cost. Sections 4 and 5 draw the production possibility frontier and move it. Sections 6 to 9 cover economic systems, the two halves of the subject, facts against opinions, and models. Sections 10 to 12 are problems, worked, shared and alone. Section 13 is Pakistan, 14 the critics and 15 the usual confusions. The exam material follows from section 16.

Before you start

You need no economics to read this chapter, only arithmetic. Four plain words come up again and again, so here they are in one place.

Wants are everything people would like to have or do. Food, a house, a phone, school for the children, a holiday, a day off. Wants have no fixed end. When one is met, another takes its place.

Resources are what people use to meet their wants. Economists sort them into four kinds. Land means everything nature gives, so it covers the soil, the water in the canal, the gas under Sui and the fish in the sea. Labour is human work, of the hand and of the mind. Capital is the things people have made to help them make other things, such as a tractor, a sewing machine, a factory building or a road. Enterprise is the work of the person who brings the other three together, takes the risk and decides what to make. When this book says “resources” it means these four, and money is not one of them. Money is a claim on resources, which is why a family’s income in rupees works as its resource in the first section.

Goods are things you can touch, such as wheat, cloth or a motorcycle. Services are useful work done for you, such as teaching, a doctor’s visit or a bus ride.

The margin means one more, or one less. A farmer deciding whether to sow one more acre with mustard is deciding at the margin. Economists keep coming back to it, because most real choices are about a little more of one thing and a little less of another.

1. One family’s month in Multan

Tariq Qureshi drives a delivery van in Multan. His wife Rubina gives tuition to the neighbourhood’s children in the afternoons. Between them they bring home Rs 90,000 a month. They have two children at school and they rent a small house near Bosan Road. On the first of each month Rubina sits with a notebook and divides the money. This is her plan for the month.

Now Tariq’s younger brother offers them his old motorcycle on instalments of Rs 9,500 a month. With it Tariq could take extra deliveries in the evening, and the children would not need the school van. Everybody in the house wants it. The trouble is that the notebook has no room. The plan already spends every rupee. To pay Rs 9,500 a month, something worth Rs 9,500 has to go. They could stop saving the Rs 6,000 and cut the food bill by Rs 3,500. They could move the children to a cheaper school. They could give up the internet and buy less meat. Whatever they choose, they get the motorcycle only by giving up something else they also wanted.

This small scene holds the whole of economics. Look at its three parts. The family has wants with no end. Food, rent and fees were already there, and the motorcycle is a new want. They have limited means, Rs 90,000 a month and no more, and only so many hours in each day. Each rupee also has more than one use. The same rupee can pay for flour or for an instalment, but it cannot pay for both. Wants that run past the means, and means that could go to more than one want, force a choice. When wants are greater than the means of meeting them, economists call it scarcity.

Scarcity does not mean poverty. A rich family in Defence, Lahore, faces it too. Its wants are bigger, a second car, a house in Islamabad, a son’s university fees in London, and its income still runs out before they do. Scarcity is not a shortage either. A shortage is when a shop runs out of sugar for a week. Scarcity is permanent. It is the gap between what people want and what they can have, and it never closes, because wants keep growing while means are always finite. Time is the clearest case. Rubina has twenty-four hours a day like everyone else. An hour of tuition is an hour not spent cooking or resting, and no amount of money buys a twenty-fifth hour.

Some things are not scarce. The air you breathe is there in such plenty that your breathing takes nothing from anyone else. Economists call such a thing a free good. A good that has a price, or costs some effort to get, is an economic good, and economics is about economic goods. A free good can also stop being free. Clean air in Lahore in November is scarce, and people now pay for purifiers to get it. Water from the Indus was once treated as free, and it is now shared between the provinces by a formal accord because there is not enough for everyone’s fields.

2. What economics is

Economists have defined their subject in more than one way, and FPSC expects you to know the main definitions and how they differ.

The definition most textbooks now teach is Lionel Robbins’s, from his book of 1932, An Essay on the Nature and Significance of Economic Science. Robbins was a professor at the London School of Economics. His definition reads in full:

“Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”¹

Each part of that sentence is one of the three parts of the Qureshi family’s problem. Ends are the wants. Scarce means are the limited resources, the Rs 90,000 and the hours. Alternative uses are the fact that each rupee could go to more than one want. Figure 1 sets them side by side.

Robbins made the point that all three must be present. If the family had enough money for everything they wanted, there would be no choice. Robbins put it that a person with “ample time and ample means” for everything they want faces no economic problem at all. If the means had only one possible use, there would be no choice either. His example is the manna that fell from heaven for the Children of Israel, which the Quran and the Bible both describe. It “may have been scarce, but, if it was impossible to exchange it for something else or to postpone its use”, it raised no economic question.¹ Only when wants exceed means, and the means have other uses, do we have to choose. In Robbins’s words, “behaviour necessarily assumes the form of choice”, and “if we choose one thing we must relinquish others”.¹ To relinquish means to give up.

So for Robbins, economics is not about a kind of thing, such as money or factories. It is about a kind of behaviour, the behaviour of choosing under scarcity. That is why the definition reaches so far. A government choosing between defence and hospitals, a student choosing between a job and full-time study for CSS, and a farmer choosing between two crops are all making economic choices.

Robbins was answering an older definition, Alfred Marshall’s. Marshall’s Principles of Economics (first published in 1890) was the textbook of the English-speaking world for forty years. It opens like this:

“Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.”²

The phrase to take from it is “the material requisites of wellbeing”, the material things people need to live well. For Marshall, economics studies how people earn a living and spend it in order to be well, and it is a study of welfare. That is why it is called the welfare definition. Robbins thought this too narrow and too vague. The services of a cook or an opera dancer are not material things, yet their wages are plainly a matter for economics, and Robbins used both as examples. His other example was war, which does nothing for welfare but plainly has an economic side because it pulls scarce men and materials away from other uses.¹

Before both of them came Adam Smith, the Scottish writer whose Wealth of Nations (1776) is where the modern subject begins. Smith did not give a one-line definition. His title says what he thought economics was about, the nature and the causes of the wealth of nations. This is often called the wealth definition. You will meet Smith again in section 6.

Most modern textbooks add one more thing to Robbins, which is time and growth. Paul Samuelson’s widely used definition speaks of how societies use scarce resources to produce valuable goods and to share them out among different people. It adds that this happens over time, so a country can choose to consume less today and build more for tomorrow. This is sometimes called the growth definition, and section 14 returns to why it was added.

When a question asks you to “define economics”, give Robbins’s definition word for word, explain its three parts with an example, and then show you know the other two by a sentence each. That is four or five marks earned in a paragraph.

3. Opportunity cost

Go back to the motorcycle. Suppose the Qureshis decide to take it, and to pay for it they give up the Rs 6,000 of saving and cut Rs 3,500 from the food bill. The cost of the motorcycle to them is not only “Rs 9,500 a month”. It is the safety of having some money put aside for Eid and for illness, and the meat and fruit they will no longer buy. That is what they gave up. Economists call it the opportunity cost of the motorcycle.

The opportunity cost of anything is the value of the best alternative you give up to get it. Three words in that sentence matter.

Best. You usually have several alternatives, but you can give up only one of them at a time, because you could only have taken one. A graduate in Faisalabad has two job offers, one at a bank for Rs 70,000 a month and one at a school for Rs 45,000. She turns both down to study full time for CSS for a year. Her opportunity cost is not Rs 115,000 a month, because she could never have done both jobs. It is the best one she gave up, the bank’s Rs 70,000. Over a year that is Rs 840,000, a real price for a year of study, and worth knowing before she starts.

Alternative. The cost is what the same resource would otherwise have done. The fees she pays for an academy are part of it too, but even if the academy were free she would still pay the Rs 70,000 a month she is not earning.

Gives up. Opportunity cost is about what you lose by choosing, not what you pay. Money is often how we measure it, as in the example above, but the thing given up need not be money. The opportunity cost of an hour spent on social media is the hour of study, or of sleep, that it took the place of.

Economics uses this idea far more than the money price, for one reason. Money shows what a thing costs the buyer in rupees. Opportunity cost shows what it costs the person, the farm or the country in the things they could have had. When the government builds a motorway with borrowed money, the real cost is the schools, hospitals or lower taxes that money could have paid for. The rupee figure in the budget hides that. Opportunity cost brings it into the open.

This is also why CE-2023 asked why “the economic definition of profit requires that we value all inputs and the outputs at their opportunity cost”. An accountant counts only the money a business pays out. An economist also counts the money the owner could have earned elsewhere with the same time and savings. A shopkeeper in Hyderabad who makes Rs 60,000 a month after paying his bills looks profitable. If he could earn Rs 80,000 as a manager elsewhere, and his savings in the shop would earn Rs 10,000 a month in a bank, his economic profit is a loss of Rs 30,000 a month. He is better off closing. The chapter on costs in the short run teaches this properly. The root of it is here. Every input has an opportunity cost, whether or not anyone pays for it in cash.

4. The production possibility frontier, drawn step by step

Economists have one diagram that shows scarcity, choice and opportunity cost at once. It is the first diagram every Economics paper expects you to draw well, and CE-2026 asked for exactly this graph. It is called the production possibility frontier (PPF). Some books call it the production possibility curve, which is the same thing. We build it on one farm.

Ali Bakhsh owns ten acres of land near Sargodha. In the rabi season, the winter crop season that runs from October or November to April, he can sow wheat or mustard, or some of each. He has the land, his own labour and his two sons’, a tractor he hires by the day, and the canal water his turn allows. These are his resources, and for this season they are fixed. His methods of farming are fixed too, as are the seed he uses and the way he sows and waters. So the question is a narrow one. With these resources and these methods, what mixes of wheat and mustard can he grow?

He knows his land well. If he sows all ten acres with wheat, he gets 400 maunds of wheat and no mustard. If he sows all of it with mustard, he gets 160 maunds of mustard and no wheat. In between he can split the land, and his best mixes look like this.

Now draw it, one step at a time.

Step 1. The axes. Put mustard along the bottom, the horizontal axis, and wheat up the side, the vertical axis. Label each with its name and its unit, maunds. A diagram with unlabelled axes loses marks however good the rest is.

Step 2. The points. Mark the five mixes. A sits on the wheat axis at 400, because it has no mustard. E sits on the mustard axis at 160, because it has no wheat. B, C and D fall between.

Step 3. The curve. Join the points with a smooth curve. Every point on that curve is a mix Ali Bakhsh can grow if he uses all ten acres and works them as well as he knows how. The curve is the frontier, the edge of what is possible.

Step 4. A point inside. Mark G at 80 maunds of mustard and 200 of wheat. He could grow this, but he does not have to settle for it. At C he would get the same 80 of mustard and 300 of wheat. G is what happens if two acres lie unsown because the canal turn was missed, or a son is away and the work is done badly. A point inside the frontier means resources are lying idle or being wasted. Economists call that inefficient.

Step 5. A point outside. Mark H at 120 maunds of mustard and 280 of wheat. With today’s land and methods, Ali Bakhsh cannot reach H however hard the family works. A point outside the frontier is unattainable. It is a want the means cannot meet, which is scarcity drawn on paper.

Figure 2 is the finished diagram, with one more curve on it that section 5 explains. Read it as you would read a sentence. The frontier shows the most of one crop he can get for each amount of the other. The frontier slopes down, and that slope is the trade-off. To get more mustard, he must move down the curve and give up wheat. He cannot have more of both, at least not on the frontier. Opportunity cost is what the curve shows as he moves along it. The move from A to B costs him 25 maunds of wheat for 40 of mustard. The move from D to E costs him 175 maunds of wheat for the same 40 of mustard.

That last point is why the curve bows outward, away from the corner where the axes meet. Economists call this shape concave to the origin. The origin is the point (0, 0) in the corner. Think about why the cost rises. Ali Bakhsh’s ten acres are not all alike. Some lie low and hold the canal water well, which suits wheat. Some are lighter and higher, where mustard does nearly as well as wheat. When he starts growing mustard, he puts it on the higher fields first, where it loses him the least wheat. As he grows more, he must put mustard on the low, wet fields that are best for wheat. Each extra 40 maunds of mustard now costs far more wheat than the first 40 did. This is the law of increasing opportunity cost. Resources are not equally good at everything, so the more of one good you make, the more of the other each extra unit costs. Section 10 measures this cost exactly.

The frontier would be a straight line only if every resource were equally good at both jobs. Then each extra maund of mustard would cost the same amount of wheat however much mustard he already grew. Section 11 has a case like that, a workshop where an hour of sewing makes the same thing whichever hour it is.

5. What moves the frontier

The frontier is drawn for fixed resources and fixed methods. Change either, and the whole curve moves.

Suppose that next season Ali Bakhsh buys a better wheat seed from the research station at Faisalabad, and he and two neighbours put in a tubewell, so his fields no longer wait for the canal turn. Now his ten acres can give 480 maunds of wheat, or 192 of mustard, or more of both in any mix. The whole frontier moves outward. That is the dashed curve in Figure 2. H, which was out of reach last season, now lies inside the new frontier. Better methods, more machines, more workers, more skills, more land brought under the plough, all push the frontier out. An outward shift is what economic growth means on this diagram. A country grows when it can produce more of everything.

The frontier can move inward too. The floods of 2022 left fields in Sindh under water for months. A farm whose land is waterlogged has fewer usable acres, so its frontier moves in, and what it could grow before is now out of reach. A war that destroys factories, a drought, or an exodus of trained doctors and engineers abroad all pull a country’s frontier inward.

A change can also favour one good more than the other. If the better seed improves only wheat, the frontier swings out along the wheat axis and stays put at the mustard end, because with all ten acres under mustard the new wheat seed does nothing. Draw it as a curve that still meets the mustard axis at 160 but now meets the wheat axis higher than 400.

Keep three movements apart, because examiners test them. A movement along the frontier is a choice, more of one good and less of the other, with resources and methods unchanged. A movement from inside to the frontier is putting idle resources to work, which gives more of both at no cost in either. A shift of the frontier is a change in the resources or the methods themselves. The first is about choosing, the second about waste, and the third about growth.

There is one more lesson in Figure 2 for a whole country. Ali Bakhsh could grow more next year by sowing less this year, for example by keeping land and water aside to raise seed or by spending his savings on a tubewell instead of a wedding. A country has the same choice. If it produces more machines, roads and skills today, which economists call capital goods, and fewer goods to be used up now, then its frontier moves out faster in the future. Present consumption is the opportunity cost of future growth. This is the root of the growth definition of economics, and of every debate about how much Pakistan saves and invests, which you will meet in Paper II.

6. The three questions and the systems that answer them

Every society, from a village to a country, faces the same scarcity the Qureshis faced, so every society has to answer three questions.

What to produce, and how much. More wheat or more mustard. More motorways or more schools. More tanks or more hospitals.

How to produce it. With many workers and few machines, as a family farm does, or with few workers and many machines, as a large mechanised farm does. With coal power or with solar.

For whom to produce it. Who gets the goods once they are made. The share each person gets depends on what they earn, what they own and what the state gives them.

Societies have answered these questions in different ways, and the ways are called economic systems. There are four you need to know.

The market economy. In a market economy, also called capitalism or the free market, the three questions are answered by people buying and selling. Firms make what people will pay for, because that is how they earn a profit. They produce it in the cheapest way, because a firm with higher costs loses to its rivals. The goods go to those who can pay, so “for whom” depends on income. Prices carry the information. When mangoes are scarce their price rises, buyers buy fewer, and growers grow more next year. Nobody has to order it.

Adam Smith explained why this can work even though each person thinks only of himself. In a passage every student of economics should know, he wrote:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”³

The baker in your street does not bake for your sake. He bakes to earn a living, and you get your bread because baking it pays him. Smith went further. A person who invests his money “intends only his own gain”, and yet he is “led by an invisible hand to promote an end which was no part of his intention”.³ The invisible hand is Smith’s picture for the way prices and profit guide millions of selfish choices into an order that serves most people. It is the strongest argument for markets, and it is an argument you must be able to state fairly before you criticise it.

Markets also fail, and much of this subject is about how. Some goods, such as clean air, a police force or flood defences, no business will provide for profit, because nobody can be made to pay for them. A factory that pours waste into a canal does not pay for the harm to farms downstream. Where one firm controls a market, it can charge what it likes. Markets also leave the poor with what their income allows, which can be very little. Later chapters treat each failure in turn.

The command economy. In a command economy, also called a planned or socialist economy, the state owns the land, the factories and the mines, and a central planning office answers the three questions. It decides how much steel and how much bread to make, which factory makes it, and how it is shared out. The Soviet Union ran its economy this way from the late 1920s until 1991, and China did so before its reforms from 1978. A command economy can move fast on a goal the state sets, such as building heavy industry or a defence sector. Its weakness is information. No planning office can know what millions of people want or what each factory can best make, and without prices to guide them planners made too much of some things and too little of others. Shortages, queues and waste were common. Both the Soviet Union and China moved away from the system, in different ways.

The mixed economy. Almost every country today, Pakistan included, runs a mixed economy. Most goods are made and sold in markets, but the state owns some enterprises, provides goods the market will not provide, regulates prices in some markets, taxes, and pays for schools, hospitals and help for the poor. In Pakistan the textile mills, the shops and most farms are private. The railways, much of the electricity distribution and many big enterprises are owned by the state. The State Bank sets interest rates and the government sets the support price for wheat in some years. What makes an economy mixed is not a fixed share of each. It is that both markets and the state answer the three questions, and the argument is always over where the line should run.

The Islamic economic system. Islam gives its own principles for answering the three questions, and Pakistan’s Constitution writes some of them into the duties of the state. The principles accept private property, trade and profit. The Prophet Muhammad (peace be upon him) was himself a trader. They also set limits on how wealth is earned and how it is spent. Riba is forbidden. Zakat takes a share of a Muslim’s savings each year for the poor and needy. Wealth is to be spent with moderation, and the Quran describes the true servants of Allah as “those who, when they spend, are neither extravagant nor miserly”.⁴ The Quran also gives a reason when it assigns the fai’, the wealth that came to the Prophet (peace be upon him) without fighting. After Allah and the Messenger, it names the kinsmen, the orphans, the needy and the wayfarer, and it says this is “so that it may not circulate only between the rich among you”.⁵

That last aim is in Pakistan’s Constitution. Article 38(a) tells the State to secure the people’s well-being “by preventing the concentration of wealth and means of production and distribution in the hands of a few to the detriment of general interest”.⁶ Article 38(f) commits the State to eliminate riba. The Islamic system is often described as a middle way. It keeps markets and private property, which the command system removes, and it limits greed and the gathering of wealth in a few hands, which the market system allows. Later chapters on interest-free banking and on zakat show how far Pakistan has gone in practice. For now, the point is that Islam does not deny scarcity. It disciplines the wants that scarcity sets against the means, by moderation, and it shapes the answer to “for whom” by sharing.

7. Microeconomics and macroeconomics

Economics has two halves, and the two papers of the CSS reflect them.

Microeconomics studies the choices of single units in the economy, which means one household, one firm, or one market. How the Qureshis spend their Rs 90,000. How Ali Bakhsh chooses his crops. Why the price of tomatoes in Lahore jumps in some weeks. How a sugar mill decides how much to produce, and whether a cement company with few rivals charges more than it would in a crowded market. “Micro” comes from a Greek word for small. Paper I’s first head, microeconomics, is this half.

Macroeconomics studies the economy as a whole. It asks about the totals, Pakistan’s total output and its growth rate, the general level of prices and how fast it rises (inflation), how many people who want work cannot find it, the balance of trade with the rest of the world, the government’s budget, and the State Bank’s policy rate. “Macro” comes from a Greek word for large. The macroeconomics head of Paper I and most of Paper II are this half.

The line is not a wall. A rise in the price of wheat, which is a micro matter, is also a large part of Pakistan’s inflation, which is a macro matter, because wheat flour is so large a share of what families buy. The policy rate, a macro tool, changes the instalment on every car loan, which is a micro decision. An answer that links the two shows the examiner you understand both.

8. Positive and normative statements

Read these two sentences.

If the government raises the tax on cigarettes, people will smoke fewer of them.

The government should raise the tax on cigarettes.

The first is a claim about what happens. You can test it. You can look at what happened to cigarette sales after past tax rises in Pakistan and in other countries, and the evidence will support the claim or count against it. A statement that can, at least in principle, be checked against facts is a positive statement, and the part of the subject that deals in them is called positive economics. “Positive” here does not mean good or hopeful. It means about what is.

The second is a claim about what ought to be. No figure can prove it right or wrong, because it rests on a judgement of value. Is the health of smokers worth the loss of their pleasure and the harm to the tobacco farmers of Swabi? People who agree on every fact can still disagree on that. A statement of what ought to be is normative, and it belongs to normative economics.

A quick test is to look for “should”, “ought”, “better”, “fair” or “too much”. They usually mark a normative statement. The test is not perfect, so ask the real question instead. Could evidence settle this? If yes, it is positive, even if it turns out to be false. “Pakistan’s inflation was zero last year” is false, but it is positive, because a figure can show it false.

Economists value the line because it keeps their work honest. On positive questions, such as what a tax will do, they can argue from evidence and often agree. On normative questions, such as whether the tax is fair, an economist’s opinion is one citizen’s opinion. Good economic advice says plainly which part is which. It says what a tax would raise and how much it would cut smoking, and it leaves to Parliament whether that is worth it. Robbins himself held that economics is a positive science, neutral between ends. It tells you what your choices will cost, and it cannot tell you what to want. Section 14 shows why many economists think that is too narrow.

9. Models, and “other things being equal”

The production possibility frontier is a model. A model is a simplified picture of some part of the economy, built to show one relationship clearly. Ali Bakhsh’s farm in section 4 grows only two crops, has fixed land and fixed methods, and nothing else changes for a season. No real farm is like that. Real farms keep animals, grow fodder, sell some milk, and face weather that changes every week. The model leaves those things out on purpose, so that the one thing we want to see, the trade-off between two uses of the same land, stands out.

A map works the same way. A map of Lahore that showed every tree and every brick would be as big as Lahore and of no use. A good map leaves out almost everything so that the roads can be seen. A model is judged the same way. The question is not whether it is realistic in every part, but whether it helps us understand and predict what it was built for.

Economics needs models because it cannot run the experiments a chemist can. A chemist can heat one sample and leave a second alone, then compare them. An economist cannot take two Pakistans, raise petrol prices in one and leave the other alone. In the real world many things change at once. In one month the price of petrol rises, wages change, the rupee moves and the rains are late. If the sale of motorcycles falls, which change caused it?

So an economist uses an assumption with a Latin name, ceteris paribus, which means “other things being equal”, or other things staying the same. To study how the price of petrol affects motorcycle sales, the economist holds everything else fixed in the mind, wages, the rupee and the rains, and asks what the change in petrol alone would do. It is a way of thinking about one cause at a time, not a claim that nothing else changes. Every curve in this subject is drawn ceteris paribus. The demand curve for petrol shows how buying changes with the price of petrol when income, other prices and tastes stay the same. When one of those does change, the whole curve moves, which is the subject of the chapter on market equilibrium.

This is exactly what CE-2024’s second question asked, “Why do economists use the ceteris paribus assumption?”, before asking how several events would change the market for oil. The answer the examiner wanted is the one in this section. Economists use it because many causes act at once in the real economy and cannot be separated by experiment, so the assumption lets them isolate the effect of one cause. It makes the model’s predictions clear and testable. Its limit is that in the real world other things are rarely equal, so a prediction made ceteris paribus can be swamped by changes it held fixed. The second half of that question, the four events in the oil market, is worked in the chapter on market equilibrium.

10. A problem worked through, the cost of mustard on Ali Bakhsh’s farm

The problem. Using Ali Bakhsh’s table in section 4, find the opportunity cost of mustard at each step from A to E, in total and per maund. Say what the results show and why.

Step 1. Find what each move gives up. Each move adds 40 maunds of mustard. Read off how much wheat falls each time.

• A to B: wheat falls from 400 to 375, so 25 maunds are given up.
• B to C: from 375 to 300, so 75.
• C to D: from 300 to 175, so 125.
• D to E: from 175 to 0, so 175.

Step 2. Find the cost per maund of mustard. Divide the wheat given up by the 40 maunds of mustard gained.

• A to B: 25 ÷ 40 = 0.625 maunds of wheat for each maund of mustard.
• B to C: 75 ÷ 40 = 1.875.
• C to D: 125 ÷ 40 = 3.125.
• D to E: 175 ÷ 40 = 4.375.

Step 3. Check the totals. The four costs add up to 25 + 75 + 125 + 175 = 400 maunds of wheat, which is all the wheat at A. That is right, because going from A to E means giving up all the wheat to get all 160 maunds of mustard. A check like this catches a misread table.

Step 4. Say what it shows. The opportunity cost of mustard rises at every step. The last 40 maunds cost seven times as much wheat as the first 40, because 175 ÷ 25 = 7. Figure 3 shows the four costs as bars.

Step 5. Say why. The cost rises because Ali Bakhsh’s land is not equally suited to the two crops. He moves the fields where mustard does nearly as well as wheat first, so the first mustard costs little wheat. The last fields he moves are the low, well-watered ones best suited to wheat, where mustard gains him little and wheat is lost in large amounts. This is the law of increasing opportunity cost, and it is why his frontier bows outward.

Step 6. Turn it round. The cost of wheat in mustard is the same trade read the other way. Going from E to D, he gains 175 maunds of wheat by giving up 40 of mustard, so each maund of wheat costs 40 ÷ 175 maunds of mustard, about 0.23. Going from B to A, he gains 25 of wheat for 40 of mustard, so each maund of wheat costs 40 ÷ 25 = 1.6 maunds of mustard. The cost of wheat also rises as he grows more of it. Increasing opportunity cost works in both directions.

In an exam answer, the table of Step 2 and one sentence of Step 5 are worth more than a page of description, because they show the examiner that you can measure the idea and explain where it comes from.

11. A problem to do together, Shazia’s workshop

Shazia runs a small tailoring workshop in Faisalabad. She works 40 hours a week. A shirt takes her 2 hours to cut and sew. A shalwar kameez suit takes her 4 hours. Every hour of her work is as good as every other, whichever garment she makes. Work out her production possibilities and their opportunity cost. Try each step yourself before you read on.

Your first step. Find the two ends of her frontier. If she makes only shirts, how many can she make in a week? If she makes only suits, how many?

Her week is 40 hours. Only shirts gives 40 ÷ 2 = 20 shirts. Only suits gives 40 ÷ 4 = 10 suits. So her frontier runs from 20 shirts and no suits to 10 suits and no shirts.

Your second step. Find the opportunity cost of one suit, in shirts.

One suit takes 4 hours. In those 4 hours she could have made 4 ÷ 2 = 2 shirts. So one suit costs 2 shirts. Turned round, one shirt costs half a suit.

Your third step. Does the cost change as she makes more suits? Why or why not?

It does not. The tenth suit costs 2 shirts, just as the first did, because every hour of hers is equally good at both garments. Nothing like Ali Bakhsh’s mixed fields exists here. So her frontier is a straight line from 20 on the shirt axis to 10 on the suit axis. A constant opportunity cost gives a straight-line frontier, and a rising one gives a curve bowed outward.

Your fourth step. Three customers ask for three different weekly mixes. Say for each whether it is on the frontier, inside it or outside it.

• 10 shirts and 5 suits. This takes 10 × 2 + 5 × 4 = 20 + 20 = 40 hours. It uses the whole week, so it is on the frontier.
• 8 shirts and 4 suits. This takes 16 + 16 = 32 hours. Eight hours are left idle, so it is inside the frontier.
• 12 shirts and 5 suits. This takes 24 + 20 = 44 hours. She has only 40, so it is outside the frontier and cannot be done this week.

Your last step. Shazia buys an electric sewing machine, and a shirt now takes her 1 hour, while a suit still takes 4. What happens to her frontier?

The shirt end moves out to 40 ÷ 1 = 40 shirts. The suit end stays at 10. The frontier swings out along the shirt axis. The opportunity cost of a suit has risen, from 2 shirts to 4, because each hour spent on a suit now gives up more shirts than before. The machine made her better at shirts, so time spent on anything else costs more.

12. Problems to do alone

Try each problem on paper before you open its answer.

1. Pakistan’s economy is shown, much simplified, as making only two kinds of things, food and cloth. The table shows its best mixes, in millions of tonnes of food and millions of metres of cloth.

Find the opportunity cost of each 10 million metres of cloth, and say what shape the frontier has.

2. In problem 1, Pakistan produces 30 million tonnes of food and 15 million metres of cloth. Is this efficient? What does it tell you about the economy?

3. Say whether each event moves the economy along its frontier, from inside towards it, or shifts the frontier itself, and which way. (a) A new high-yield wheat seed is used across Punjab. (b) Factories closed by gas shortages reopen when supply returns. (c) The government decides to grow more cotton and less sugarcane. (d) A flood washes away irrigation channels across lower Sindh.

4. Shahid, who lives in Peshawar, has three ways to spend his Saturday. He can work an extra shift for Rs 4,000, tutor a student for Rs 2,500, or go to a friend’s wedding. He goes to the wedding. What is the opportunity cost of going?

5. Say whether each statement is positive or normative. (a) Pakistan’s population grew faster in the 2010s than India’s. (b) The rich should pay a higher share of their income in tax. (c) If the price of sugar rises, people will buy less sugar, other things being equal. (d) Inflation above 20 per cent is too high for any country.

6. Say whether each question belongs to microeconomics or macroeconomics. (a) Why did the price of onions in Rawalpindi double in one month? (b) Why did Pakistan’s growth rate fall? (c) How does a cement company decide its price? (d) What does a rise in the State Bank’s policy rate do to inflation?

13. Scarcity in Pakistan’s budget for 2026-27

A government faces scarcity just as the Qureshi family does, and its budget is its notebook. Each June the Finance Minister presents the federal budget to the National Assembly, which shows what the government plans to spend in the coming year and where the money will come from. The budget for 2026-27, the year from 1 July 2026 to 30 June 2027, plans federal spending of Rs 18,771 billion.⁷ Figure 4 shows where the largest parts go.

The biggest single item is not defence or development. It is interest on the money the government has borrowed in past years, Rs 8,054 billion, or 42.9 per cent of all federal spending. Defence takes Rs 3,000 billion, 16.0 per cent. The federal Public Sector Development Programme, the money for new projects such as roads, dams and hospitals, gets Rs 1,000 billion, 5.3 per cent. Interest alone takes more than eight times the development programme.⁷

Read that as an opportunity cost. Each rupee paid in interest is a rupee that cannot build a school or a hospital this year. The government’s own revenue, after the provinces have taken their share under the NFC award, is Rs 11,751 billion, and interest takes 68.5 per cent of it. The rest of the spending, Rs 7,020 billion, is found almost wholly by borrowing more. Rs 4,012 billion comes from banks, Rs 2,034 billion from the public through national savings schemes and the like, and Rs 813 billion net from abroad. Privatisation brings in the last Rs 161 billion.⁷ Borrowing today is how the government reaches a point beyond its own means this year, much as the Qureshis could reach for the motorcycle with a loan. The loan has to be paid back, with interest, out of future years’ means. A large part of today’s interest bill is the opportunity cost of past years’ borrowing, now coming due.

The choice between defence and development is the oldest example of a production possibility frontier in the textbooks, where it is called “guns and butter”. A country that faces real threats on its borders spends on defence because it must, and every rupee spent there has an opportunity cost in schools, roads or lower taxes. Economics cannot tell the government how much security is worth, because that is a normative question. It can show the cost of each choice in the things given up, and that is what a good budget debate weighs.

Pakistan’s Constitution recognises scarcity in its own words. Article 38(b) tells the State to provide all citizens with facilities for work and adequate livelihood “within the available resources of the country”.⁶ The phrase admits that even duties the Constitution sets must be met from limited means, which is Robbins’s point written into law.

14. What the critics say

Robbins’s definition is the one you will quote, but it has been criticised from several sides, and a strong answer shows you know the criticisms.

The welfare school’s reply. Economists in Marshall’s tradition said Robbins made economics cold. By treating all ends as equal, so that choosing between bread and a luxury car is the same kind of act, he took away the reason most people study the subject, which is to make human life better. A science that will not say that feeding the hungry matters more than a rich man’s third car has, they argued, given up its purpose. Robbins’s answer was that an economist can still show what each policy costs, and leave the judgement of ends to citizens. The two views still meet in every debate about tax and welfare.

Too wide and too narrow. Critics said Robbins’s definition is too wide, because it takes in every choice, even a chess player choosing a move or a person choosing which friend to visit. It leaves economics without a clear subject matter of its own. It has also been called too narrow, because it treats the means and the ends as given. It says nothing about how the economy grows, how new resources are found, or how wants themselves are shaped by advertising and custom. The growth definition, of Samuelson and others, was added to bring growth and change over time back in.

The Keynesian objection. In the Great Depression of the 1930s, a quarter of America’s workers had no jobs and factories stood empty. On the frontier diagram, the economy was far inside its frontier. The problem was not choosing between scarce resources but putting idle ones to work. John Maynard Keynes argued that in such times the main economic question is why resources lie unused, and what can bring them back into use. Robbins’s definition, written in 1932, at the bottom of the Depression, said little about this. Much of macroeconomics grew out of the question Keynes asked.

Sen’s view. The Indian economist Amartya Sen, who won the Nobel prize in 1998, argued that economics should judge outcomes by what people are able to do and to be, such as being healthy, educated and free to take part in the life of their society, not only by how much income or how many goods they have. On his view, scarcity is not only of goods but of the freedoms that goods make possible, and a country is developed when its people have more of those freedoms. The Pakistani economist Mahbub ul Haq built on this view when he designed the United Nations’ Human Development Index in 1990, with Sen’s help. It ranks countries by health and education as well as income.

Islamic views on wants. Writers on Islamic economics accept that resources are limited. Some argue that the deeper problem is not scarcity as such but how wealth is shared and how wants are formed. Wants are not to be taken as given and endless, because Islam teaches moderation in spending, as the verse quoted in section 6 says. A society that discourages waste and luxury and shares its wealth, through zakat and the ban on riba, lowers the gap between wants and means. M. Umer Chapra, a Pakistani economist born in Bikaner in British India, who worked for many years at the Saudi central bank, described this as a moral filter on wants that works alongside the price filter of the market. The view does not deny scarcity. It denies that wants must be accepted as they are.

15. What students mix up

Scarcity and poverty. Students write that scarcity exists because Pakistan is poor. Scarcity exists in every country, rich or poor, because wants everywhere run past the means. Poverty is having too little for basic needs. A rich country faces scarcity too.

Scarcity and shortage. A shortage of sugar in the shops is a short-term gap that a change in price or supply can close. Scarcity is permanent and cannot be closed.

Opportunity cost as all the alternatives. It is the best one alternative given up, never the sum of all of them, because you could only have had one.

Opportunity cost as the money price. The price you pay is one part of it at most. A free ticket to a match still costs you the evening.

A point inside the frontier as scarcity. A point inside shows idle or wasted resources. Scarcity is what makes points outside the frontier unattainable.

A movement along the frontier and a shift of it. A choice between goods, with resources fixed, is a movement along. A change in resources or methods is a shift.

A straight frontier and a curved one. Students draw the frontier straight and then explain increasing opportunity cost. A straight line means a constant opportunity cost. If the cost rises, the curve must bow outward. Draw what you explain.

“Positive” means good. A positive statement is one evidence could test. It may be gloomy and it may be false.

Ceteris paribus as a claim about the world. It does not say that other things stay the same in reality. It is a way of looking at one cause at a time.

16. What FPSC has asked on this chapter

CE-2026, Paper I, Question 2 (20 marks). “Scarcity leads to economic choices.” Pick one of the famous principles of economics and explain this concept using a graph. Give an example of an economic decision you made and what you gave up when you made your choice.¹⁰

CE-2024, Paper I, Question 2 (20 marks). Why do economists use the ceteris paribus assumption? It goes on to ask how four events would change the equilibrium price and quantity in the market for oil, each with its supply and demand diagram.⁹ Section 9 answers the first part. The oil market is worked in the chapter on market equilibrium.

CE-2023, Paper I, Question 3 (20 marks). Define opportunity costs and explain why the economic definition of profit requires that we value all inputs and the outputs at their opportunity cost.⁸ Section 3 gives the definition and the shopkeeper’s example. The full treatment of economic profit is in the chapter on costs in the short run.

The CE-2026 question is the clearest sign that this chapter is not only background. It gave a whole question, a fifth of the paper, to scarcity, the production possibility frontier and opportunity cost. Expect the definitions of economics and the PPF to come back as a question, as a part of one, or as a short note.

17. What to carry into the hall

Definitions.

• Robbins (1932): “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”
• Marshall (1890), the welfare definition: “a study of mankind in the ordinary business of life”. It is concerned with “the material requisites of wellbeing”.
• Adam Smith (1776), the wealth definition: economics as the study of the nature and causes of the wealth of nations.
• The growth definition (Samuelson and others): how societies use scarce resources to produce goods and share them out among people, over time.
• Scarcity: wants greater than the means of meeting them.
• Opportunity cost: the value of the best alternative given up.
• Positive statement: one that evidence could test. Normative statement: one that rests on a judgement of what ought to be.
• Ceteris paribus: other things being equal.

The diagram. The production possibility frontier. Two goods on the axes, each labelled with its unit. A curve bowed outward from the origin. A point inside, marked as inefficient. A point outside, marked as unattainable. An outward shift for growth. Draw it in every answer on scarcity, choice or opportunity cost.

The law of increasing opportunity cost. Because resources are not equally suited to every use, each extra unit of a good costs more of the other. That is why the frontier is bowed outward. A constant cost gives a straight line.

The three questions. What to produce, how to produce, and for whom. The four systems that answer them are market, command, mixed and Islamic.

Pakistan’s figures, budget 2026-27 (Finance Division, Budget in Brief).⁷ Federal spending Rs 18,771 billion. Interest Rs 8,054 billion (42.9 per cent). Defence Rs 3,000 billion (16.0 per cent). Federal PSDP Rs 1,000 billion (5.3 per cent). Net federal revenue Rs 11,751 billion, of which interest takes 68.5 per cent.

The Constitution. Article 38(a), preventing “the concentration of wealth and means of production and distribution in the hands of a few”. Article 38(b), work and livelihood “within the available resources of the country”.⁶

18. What loses marks on this topic

• A PPF without labels. The axes need the goods’ names and units. Points need letters. A curve with nothing on it shows the examiner a shape, not an understanding.
• A straight-line PPF beside a paragraph on increasing cost. The diagram and the words must agree.
• Defining economics only as “the study of money”. Robbins’s whole point is that it is about choice, not money.
• Quoting Robbins wrongly. “Scarce means which have alternative uses” is the heart of it. Learn the words.
• An “example of a decision you made” with no opportunity cost in it. CE-2026 asked “what you gave up”. Name the best alternative given up, with its value, and say why it was the best.
• Adding up all the alternatives as the opportunity cost.
• Treating the critics as an afterthought. “Critically” or “explain” questions on definitions reward a paragraph on the welfare school, the growth view and Keynes’s objection.
• No Pakistan. A theory answer that ends with a real Pakistani case, such as the budget’s interest bill against the PSDP, stands out from scripts that stay in the textbook.

19. An answer plan for CE-2026, Question 2

The question reads, “Scarcity leads to economic choices.” Pick one of the famous principles of economics and explain this concept using a graph. Give an example of an economic decision you made and what you gave up when you made your choice. (20 marks)

Read it first. The question has three tasks. It wants a principle explained, a graph, and a personal example with what was given up. The “famous principle” that fits best is opportunity cost, because it is what scarcity forces and what the PPF shows. Name it in your first line, so the examiner knows your choice at once. Plan about 35 minutes for a 20-mark question.

Opening, about 80 words. State what scarcity is, with Robbins’s definition. Say that scarcity forces choice, and that every choice has an opportunity cost. Name opportunity cost as the principle you will explain, and the PPF as the graph.

The principle, about 150 words. Define opportunity cost as the value of the best alternative given up. Explain why “best” and why “given up”. Give a one-line example, the graduate turning down the bank’s Rs 70,000.

The graph, about 250 words and the diagram. Draw the PPF with Ali Bakhsh’s farm or a country choosing between two goods. Label the axes, points A to E, an inside point and an outside point. Explain each in a sentence. Show the opportunity cost along the curve with two numbers, such as 25 maunds of wheat from A to B and 175 from D to E. Explain why the curve bows outward, the law of increasing opportunity cost. Add a dashed outward shift and one sentence on growth.

Your own decision, about 150 words. Use a real one, told plainly. Studying for CSS full time, and giving up a job’s salary, is the strongest, because it is true for most candidates and easy to measure. Name the best alternative and its value, in words like these. “I turned down a post at a bank paying Rs 70,000 a month. Over the year of preparation that is Rs 840,000, which is the opportunity cost of my preparation, not the academy fees alone.” Say why it was the best alternative you had.

Pakistan, about 100 words. Show the principle working for a country. Interest in the 2026-27 budget, Rs 8,054 billion, is more than eight times the federal PSDP of Rs 1,000 billion. Each rupee of interest is a rupee not spent on development.

Close, about 60 words. Scarcity cannot be removed, only managed, so choices and their costs cannot be avoided. Good choices, for a family or a country, weigh the opportunity cost and not only the price.

A model opening paragraph. Read it for the register. It is more formal than the teaching above, and that is what earns marks in the hall.

Scarcity is the permanent gap between human wants, which are unlimited, and the means of satisfying them, which are not. Lionel Robbins captured this in his definition of economics as “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. Because means are scarce and have alternative uses, every use of them is a choice, and every choice carries a cost in the alternative forgone. This principle, opportunity cost, is best explained through the production possibility frontier, and best understood through a decision of one’s own.

What to remember from this chapter

• Scarcity is wants greater than the means of meeting them. It exists in every country and never ends, so every person, firm and government must choose.
• Robbins defined economics as the study of choosing between scarce means with alternative uses. Marshall’s welfare definition and Smith’s wealth definition came before it, and the growth definition adds time.
• The opportunity cost of a choice is the value of the best alternative given up, and never the sum of all of them.
• The production possibility frontier shows the best mixes of two goods. Points inside it are wasteful and points outside it unattainable. It bows outward because opportunity cost rises, and it shifts outward when resources or methods improve.
• Every society answers what, how and for whom. Market, command, mixed and Islamic systems answer them differently, and Pakistan is a mixed economy whose Constitution adds Islamic aims.
• Microeconomics studies single units and macroeconomics the economy as a whole. Positive statements can be tested and normative ones rest on values. Models simplify, and ceteris paribus isolates one cause at a time.
• In the 2026-27 federal budget, interest takes Rs 8,054 billion, more than eight times the Rs 1,000 billion federal PSDP. Each of those rupees has an opportunity cost.

Check yourself

1. Give Robbins’s definition of economics and explain each of its three parts with an example from Pakistan.

2. Why is the production possibility frontier usually drawn bowed outward rather than straight?

3. A farmer can grow 300 maunds of wheat or 100 maunds of cotton, or any mix between, at a constant cost. What is the opportunity cost of 1 maund of cotton? Of 1 maund of wheat?

4. Draw a PPF and show on it (a) unemployment, (b) a choice to produce more of one good, and (c) economic growth.

5. “The government should spend more on education than on motorways.” Is this positive or normative? Rewrite it as a positive statement.

6. In what sense is the Islamic economic system described as a middle way between the market and command systems?

7. In the 2026-27 federal budget, what share of spending goes to interest, and what does that mean as an opportunity cost?