What is the Basic Economic Problem of Scarcity?

Instructor: Kallie Wells
Why do we have to make choices and trade-offs? Why does it cost money to produce and consume the goods society wants? The answer is scarcity. In this lesson you will better understand the concept of scarcity and why it forces us to make decisions and trade-offs everyday.

The Basic Problem - Scarcity

Scarcity is one of the most basic economic problems we face. We run into scarcity because we are a society with unlimited wants, but limited resources. Therefore, we have to choose. We have to make trade-offs. We have to efficiently allocate resources. We have to do those things because resources are limited and cannot meet our own unlimited demands.

Why Scarcity Exists

Without scarcity, the science of economics would not exist. Economics is the study of production, distribution, and consumption of goods and services. If society did not have to make choices about what to produce, distribute, and consume, the study of those actions would be relatively boring. Society would produce, distribute, and consume an infinite amount of everything to satisfy the unlimited wants and needs of humans. Everyone would get everything they wanted and it would all be free. But we all know that is not the case. The decisions and trade-offs society makes due to scarcity is what economists study. Why are certain decisions made and what is the next best alternative that they had to forego?

Scarce Goods and Services

As noted above, if scarcity did not exist, all goods and services would be free. A good is considered scarce if it has a non-zero cost to consume. In other words, it costs something. Almost every good we as individuals or as society consume costs something and is scarce. By consuming one good, another good is foregone. Therefore, scarcity forces decisions and trade-offs to be made.

Why are some scarce goods more expensive than other scarce goods? The cost of a good is a signal of its scarcity. One good may be more scare than another, either because of limited resources or higher want (demand) for that good.

Lets take two scarce goods - shark meat and chicken. Both have a non-zero cost/price, but we would all agree shark meat is much more expensive to buy than chicken. Why is that? The resources to produce shark meat are largely limited by the labor and capital it takes to catch a shark, while the labor and capital required to produce chicken is less limiting. Even though the resources to produce both are limited, there is much more labor and capital available to produce chicken than shark. Not to mention the quantity of sharks is also much more limited than that of chickens.

If the unlimited wants and needs of a particular good can be met by resources, then it's not considered scarce. This would require the resources to be unlimited as well for it to meet unlimited demand. What would be an example of a non-scarce good? Think about what you do every day. Can you think of something you consume or use that is free? Something that you have infinite access to and you would never expect to run out? Air. Air is a good that everyone has unlimited access to, and no one has to pay to consume it!

Graphical Representation

Scarcity of goods can be looked at in terms of an individual person consuming goods and services as well as society producing and distributing the goods and services to be consumed. In both cases, the resources needed are limited while the wants are unlimited.

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