Scarcity, Choice and Opportunity Cost
Economics is about the allocation of scarce resources in a world of
unlimited wants. It sets out to investigate what should be produced,
how it should be produced and for whom it should be produced.
Choices have to be made.
The Basic Economic Problem
The basic economic problem is that resources have to be allocated between
competing uses because wants are infinite whilst resources are scarce.
Unlimited wants + Limited resources = Scarcity
Scarcity – economic agents, such as individuals, firms, governments and
international agencies, can only obtain a limited amount of resources at any
moment in time.
Needs – goods and services that are essential for living, such as water, food
and clothing.
Wants – goods and services that are not essential for living, but are desirable,
such as a
car.
There are different needs and wants between different eras and different
societies. People’s wants change constantly and grow as experience and
expectations change and businesses design new products to tempt customers.
However, people may be unaware of their needs – the Government may have
to legislate to ensure that they obtain a minimum education, healthcare,
pension … (The ‘poverty line’ is the minimum requirements of food and
accommodation.)
Opportunity Cost
When making choices, the opportunity cost is the cost (not just in financial
terms) of NOT choosing the next best alternative.
For example, if a company has £200,000 to spend it might list its priorities as:
Buying a new computer system
Buying new cars for its sales staff
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Economics is about the allocation of scarce resources in a world of
unlimited wants. It sets out to investigate what should be produced,
how it should be produced and for whom it should be produced.
Choices have to be made.
The Basic Economic Problem
The basic economic problem is that resources have to be allocated between
competing uses because wants are infinite whilst resources are scarce.
Unlimited wants + Limited resources = Scarcity
Scarcity – economic agents, such as individuals, firms, governments and
international agencies, can only obtain a limited amount of resources at any
moment in time.
Needs – goods and services that are essential for living, such as water, food
and clothing.
Wants – goods and services that are not essential for living, but are desirable,
such as a
car.
There are different needs and wants between different eras and different
societies. People’s wants change constantly and grow as experience and
expectations change and businesses design new products to tempt customers.
However, people may be unaware of their needs – the Government may have
to legislate to ensure that they obtain a minimum education, healthcare,
pension … (The ‘poverty line’ is the minimum requirements of food and
accommodation.)
Opportunity Cost
When making choices, the opportunity cost is the cost (not just in financial
terms) of NOT choosing the next best alternative.
For example, if a company has £200,000 to spend it might list its priorities as:
Buying a new computer system
Buying new cars for its sales staff
1
