know why scarcity and choice underpin all economic problems
know why scarcity underpins all economic decisions
The central problem of economics - Scarcity This 2 minute video below explains the concept of scarcity which is the central problem of economics. Click the video below to understand the meaning of scarcity and how scarcity can occur at an individual level; when individuals like you and me have limited resources like time and money, but faced with unlimited wants.
What about economic resources? While the video above explains scarcity at the personal level and looks into time and money as individual resources, economists are primarily concerned with economic resources. Economic resources are productive resources that can be used to produce goods and/or services. This video below [4:20] explains the different types of economic resources - land, labour, capital and entrepreneurship.
Choices As the earth's resources are limited, there is no way for all the needs of the world to be met. Hence, we need to make choices. Owners of resources need to optimise the use of resources to maximise benefit. For example, consumers optimise the limited budget to maximise satisfaction. The firm optimises its available machinery to maximise its profits, while the government optimises the available resources under its purview to maximise the benefit to society.
The video below [2:38] gives some examples of the choices consumers, firms and government make.
Summary
Scarcity is the problem of limited resources and unlimited wants.
Economic resources are resources that can be used to produce goods and/or services. The resources include land, labour, capital and entrepreneurship.
As a result of scarcity, economic agents like consumers, firms and government have to make decisions. And they make decisions that maximise their own self-interest.
Checkpoint Try the following multiple choice questions:
Qn 1. All the following statements about scarcity and
choice are true except: (a)Scarcity implies the need for choice. (b)Choice implies the existence of opportunity cost. (c)Limited human wants necessitate choice.
[correct answer (C) - explanation human wants are unlimited but resources are limited. Hence scarcity occurs]
Qn 2. Scarcity is a problem that only affects the poor countries while rich countries are not affected by scarcity because they have an abundance of resources. True or False? (a) True (b) False
[correct ans - (b) false. Scarcity is a central economic problem, fundamental to all
economies and countries. It affects both the rich and poor countries. No matter how rich the country may be, there will still be limited land, labour capital and entrepreneurship. The human wants are unlimited for the rich and poor countries alike. Hence, scarcity is a problem that all countries will face.]
Qn 3. Match the factors of production to the examples below: