This is a body of concepts and principles which help us understand/explain and make predictions in economics. It is divided into two major parts;

a) Microeconomics.

Microeconomics is a branch of economics that deals with the economic behaviour of small units. The prefix micro comes from the Greek word “Mikros” which means small. So microeconomics deals with the behaviour of individual economic agents like consumers, producers and resource owners.

b) Macroeconomics.

Macroeconomics is the branch of economics that studies the economy as a whole. It assumes that the economy is a single functioning unit and any decision made affects all economic units. It deals with the behaviour of economic aggregates such as unemployment, inflation, aggregate demand and supply, national income, public finance and fiscal policy, economic development planning, etc.



In economics, a positive statement concerns what “is”, “was” or “will be” and contains no indication of approval or disapproval. (What should be). Positive statements are testable or at least it is possible to imagine facts that disapprove them. Examples of positive statements include;

  1. The moon is made of black and gold cheese. (This is empirically false but is still a positive statement as it is a statement about what is and not what should be.
  2. The price of sugar is high compared to what it was last year.
  3. If the government raises the tax on bear, this will lead to a fall in the profits of brewers.


A normative statement expresses a value judgement about whether a situation is subjectively desirable or undesirable. It concerns “What ought to be.” Normative statements are characterized by the modal verbs “should”, “would” or “could”. Examples of normative statements include;

  • The world would be a better place if the moon were made of green cheese.
  • The price of milk should be Shs. 1500 a gallon to give daily farmers a higher living standard.
  • The government should increase the minimum wage to Shs. 500,000 to reduce poverty.


  • Scarcity

Scarcity refers to the limited supply of economic resources in relation to peoples’ requirements/wants e.g. there is scarcity of land, scarcity of trained labour, scarcity of trained entrepreneurs, scarcity of capital, etc.

The problem of scarcity is considered to be the most fundamental problem and it gives rise to the other two.

  • Choice

Choice is defined as the making of the best decision out of the available alternatives.

Because of scarcity of resources, man must make a scale of preference.

A scale of preference is a list of wants arranged starting with the most pressing needs and ending with the least pressing ones.

When the consumer chooses the first item, second, third and so on, he is said to be making a choice.

Importance of choice

  • Guides producers on what goods to produce and in what quantity.
  • Guides producers on how to produce various goods and services.
  • Guides producers on how to distribute the goods and services.
  • Guides consumers when making consumption plans.
  • Opportunity cost/ Trade off cost/ Alternative cost/ Real cost

Opportunity cost is the second best alternative foregone when choice is made.

Opportunity cost arises out of scarcity and choice. When a consumer uses a scale of preference to make choice, it implies that he is making a decision to satisfy one set of wants. This necessarily means sacrificing some other set. It is because of the consumer’s limited resources (income) that he chooses commodity A and leaves B for the mean time. By making choice therefore, he is sacrificing commodity B for A. It is this sacrifice that is referred to as opportunity cost in economics.


  • It guides producers in resource allocation/ making production decisions. That is what to produce, when to produce, how to produce, where to produce and for whom to produce.
  • It helps consumers in making consumption decisions i.e. consumers choose commodities that yield maximum utility.
  • The concept is used in pricing factors of production e.g. workers that a producer cannot do without are paid high wages because they create a heavy opportunity cost when they are missing.
  • The concept is used when specializing in international trade. It is used in international trade under the principle of comparative cost advantage whereby a country specializes in the production of a commodity where it has the least opportunity cost.
  • It is a basis of economic planning. Government planners always look at the second best alternative foregone during the planning process. E.g. the government can spend more money on providing basic services like universal education than on recreational facilities like sports stadia.
  • It helps workers to make employment decisions. That is whether to work or enjoy leisure.


Under what circumstances may the opportunity cost principle be applied in economics?

(04 marks)


  • It is based on the assumption that producers and consumers are rational which is not always true. Many producers and consumers are not guided by a calculating mind. They simply produce or consume without looking at the opportunity cost.
  • It lacks uniformity because different people have different priorities.
  • Opportunity cost does not have a monetary value and therefore it is very hard to attach a money value to it.
  • Some factors of production are specific in that they cannot be put to alternative uses.
  • The concept assumes perfect markets which not existent in the real world.

It is not applicable in situations where factor immobility exists