Economics Is About Scarcity and Choice
Economics may be described as a study how man is able to produce, distribute, and consume the available resources to meet his daily needs. Resources have to be extracted and processed in order to put them into a form that can be used either as an end product or as a means to an end product that will be consumable. For instance, oil will have to be drilled and processed to gas or petroleum as the final products. However, this presents a problem in that mans needs are unlimited and keep changing overtime, yet the available resources tend not to move in the same pace with these needs. In the case of oil, the numbers of vehicles on the roads have increased substantially over the years yet the available oil reserves in the world are finite and drying out. Therefore, the concept of scarcity calls for individuals or decision makers to make well reasoned-out choices to meet their needs in the best manner possible, given the limitation or scarcity of resources.
The purpose of all economic activities is the production of goods and services for the satisfaction of consumer’s needs and wants, noting also that these needs and wants are broad and changing in time, place, and for different population groups. Therefore, decision makers have to make decisions that address what goods and services to produce; how best are these goods and services to be produced; and for whom these goods and services are to be produced.
Scarcity generally is the lack of resource(s) or the unavailability of it in terms of quality or quantity to meet needs as they arise. The concept of scarcity and economics claims that there is “a trade off involved between choosing alternate set of decisions” for the needs and wants to be addressed (Riley, 2006). Therefore, scarcity brings in choice where the consumer or the firm has to choose one alternative and forego another. It means that if there are several alternate uses of a resource, there will be choices that have to be made of what to produce and the extent to which it will be produced in comparison with the other alternatives. Indeed, it can be deduced that scarcity is the major fundamental problem in economics in that, wants and needs are infinite yet the available resources to meet these competitive needs are finite.
The rule of market demand and supply dictates that when there is sufficient demand and there is diminishing supply, the price of that commodity will shoot up. Making a decision on producing one good means also that another good will have to be foregone as resources being limited will go to the production of the first good. It also calls that if one produces more of one good, another good’s production will decline in exchange. For example, the production of shoes requires leather which is also required in the production of handbags and if the shoe industry increases its production and assuming that raw materials have not increased and production technology has not changed, the hand bag industry will find itself with minimal input and thus will have to cut down on its production. Nevertheless, consumers make decisions on the basis of derived utility (assuming available perfect information about market) i.e. they make decisions to maximize their welfare given the limited income they have (Baumol and Blinder, 2008, p.41).
Given that resources are limited in comparison to human wants and needs, decision makers need to learn how to make efficient appropriate choices that give the highest possible welfare. This can be described through the use of production possibility frontier which shows “all of the combinations of goods and services that can be produced if all of society’s resources are used efficiently” (Gillespie, 2007, p. 17). It also shows what an economy is capable of producing given certain constant constraints such as technology, available resources, time, and labor mobility among others.
Imagine that all of an economy’s resources, such as land, labor and capital were used in industry A, then Q0 of A would be produced and none of B. Alternatively, if all resources were transferred to industry B then Q5 of B would be produced and none of A would be made. If resources were divided between the two industries, a range of combinations of products is possible. For example, at point X the economy produces Q1 of product A and Q2 of product B; alternatively, resources could be allocated differently between the two industries and it could produce at point Y, producing Q3 of A and Q4 of B. All of the points on the frontier, such as X and Y, are said to be productively efficient because they are fully utilizing the economy’s resources. This is attractive because it shows that resources are being used properly and not wasted.
Through this scarcity in the production process can be portrayed by opportunity cost in that, to produce good A, good B will have to be foregone to some extent. Shifting production of product B from Q2 to Q4 will make production of A to decline by Q0 to Q3 which is the opportunity cost of increasing production of B. However, it is good to note that not all points are efficient as shown below:
If an economy produced at point W and not V, then it would be making more of both A and B. No economy should be operating within the PPF because will be wasting its resources. However, this can happen if resources do not reallocate effectively when conditions in an economy alter. For example, demand for product B may increase, leading to firms wanting to move from A to B. Firms in industry A close down and, in theory, they and their employees would switch to B. However, if managers and employees lack the necessary skills or experience, they may not be able to move easily. As a result the economy may get stuck at V. Hopefully, over the long term, employees will be trained and gain the skills required to take jobs. Firms will therefore be able to produce in industry B, enabling the economy to produce at a point such as X; however, in the short term at least, there is productive inefficiency. Alternatively, there could be a lack of demand in the economy, so that, although it can produce at W, customers can only afford the combination of products at V. Again, over time, demand will hopefully increase and the economy will end up on the frontier.
Resources are allocated depending on the type of economy present and price system (Baumol and Blinder, 2008, p.48). In the free market economy, resources are allocated through the price mechanism where available supply and demand interacts to determine the price. In a command economy, resources are allocated via central planning. A central committee looks at what resources are available, and then decides how they are to be combined to produce different goods and services. In most cases, the government operates in conjunction with the free markets to allocate resources by setting prices in mixed economy.
Prices are another means in which scarcity can be estimated but they don’t take into account all the problems associated with the production of that product; only the cost paid for the factors of production is factored in. However, the best measure of scarcity is the opportunity cost of that product.
In conclusion, scarcity means that people will always have wants that exceed the available resources and therefore it calls for rationality in decision making in order to prioritize the choice of those goods that are more important to their welfare. Producers will also make choices that will require producing the most efficient and profitable product and forego other production of other products due to scarcity of production inputs. Due to this scarcity of resources, welfare economics require that where an individual or firm has a combination of products, it would not be possible to increase the consumption or production of one of the products without reducing the consumption or production of the other respectively. Indeed, the concept of scarcity and choice is important in the economy’s allocation of resources.
Baumol, W. J. and Blinder, A. S. (2008). Economics: Principles and Policy. NJ, Cengage Learning.
Gillespie, A. (2007). Foundations of economics. London, Oxford University Press.
Riley, G. (2006). Scarcity and Choice in Resource Allocation. Web.