THE BASIC ECONOMIC PROBLEM AND SCARCITY
The basic economic problem is about how best to allocate resources between alternative uses in order to meet the consumers’ needs and wants, since there are only a limited amount of resources available to produce the unlimited amount of goods and services we desire.
All societies face the problem of having to decide:
- What goods and services to produce? Produce those goods that have a price and can make a profit? Or produce those that are essential for society?
- How best to produce goods and services? Use labour-intensive methods or capital-intensive production methods?
- Who is to receive goods and services? For the rich? The poor? Or should it be distributed equally?
Economic resources are finite, but human needs and wants are infinite. This is referred to as scarcity and means that there are insufficient resources to provide everyone’s wants and so people have to make a choice about how to use resources. Scarcity brings about opportunity cost as we are forced to make a choice about alternatives.
This means that there are insufficient resources to produce all the goods and services which people want. This relative scarcity of resources means that a choice has to be made.
Scarcity brings about opportunity cost as we are forced to make a choice about alternatives. We cannot satisfy all our material wants with the limited means available.
Sometimes there are competing ends for which resources could be used. When a choice arises, an alternative has to be given up. The sacrifice of the next best alternative that is forgone is termed the opportunity cost.
Examples of opportunity cost:
- a producer may have to forego expansion of a factory in order to conduct more research into a new product
- a consumer may have to forego a visit to a cinema in order to have a fast food burger meal
- a government may have to forego building a road in order to construct a hospital