SCARCITY
Definition: Scarcity refers to the basic economic problem where resources are limited but human wants are unlimited.
As a result, choices must be made and opportunity cost arises.
Basis of Scarcity:
Economic resources (land, labour, capital, enterprise) are limited.
Human wants are unlimited and recurring.
Not all wants can be satisfied at the same time.
Therefore, choice becomes necessary.
Scarcity faced by economic decision makers:
1 | Individuals | Limited income but many wants. |
Example: | A student chooses between a mobile phone and exam guide books. | |
2 | Families | Limited household budgets. |
Example: | A family chooses between a holiday and home renovation. | |
3 | Firms | Limited factors of production. |
Example: | A firm produces cars instead of bikes. | |
4 | Government | Limited tax revenue. |
Example: | More spending on healthcare instead of education |
OPPORTUNITY COST: Definition: Opportunity cost is the next best alternative that is sacrificed when a choice is made.
Link between scarcity, choice and opportunity cost:
Scarcity leads to choice, and every choice involves an opportunity cost.
Examples of opportunity cost:
1 | Individual | Buying a mobile phone instead of textbooks. |
2 | Household | Renovating a house instead of going on a holiday |
3 | Firm – | Producing laptops instead of tablets. |
4 | Government | Spending on defence instead of healthcare. |
Exam conclusion: Because resources are scarce, every economic choice involves an opportunity cost.