Economic Scarcity and the Function of Choice

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  • 0:06 Foundation of Economics
  • 1:05 Scarcity and Choice
  • 2:44 What is Economics?
  • 3:18 Incentives
  • 4:24 What is the Economy?
  • 5:02 Lesson Summary
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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

Discover the foundation of the social science of economics as we explore the basic economic problem of scarce resources and unlimited wants using key definitions that create a framework for understanding everyday behavior in a nation.

Foundation of Economics

Let's talk about the basic foundation of economics - what economics is, what's involved with it, and what the basic economic problem is. The word economy comes from two Greek words, one meaning house and the other meaning distribute. It was first used to describe the management of a household, but by the mid-1700s, it came to describe the management of the resources of a country.

The basic economic problem that we're concerned about is this: Needs and wants are unlimited, but resources are scarce. What are resources? Resources are otherwise known as the factors of production and they include land, labor, capital and entrepreneurship - everything it takes to produce the stuff that you and I buy on a regular basis in our economy.

Examples of resources

Scarcity and Choice

So, let's get back to this word, scarcity. What does it really mean when a resource is scarce? Scarcity, in general terms, means that the demand for something is much greater than the supply, or there is not enough money to buy it. The exact definition in economics is that there are insufficient resources to satisfy everyone's needs and wants. Whether you're talking about oil, from which we get the gasoline that powers most of our cars, or corn, even seats in a movie theater, there isn't enough for everyone to get what they want at a zero price. You know something is scarce if you try to offer it for free, and you don't have enough of it for everyone who stands in line to get it.

So, how does a society decide who gets what? Producers charge a price for it. That way, whoever values it the most will pay the most for it. This is how scarce resources are allocated, or divided up and distributed, efficiently in our economy. When you go to the store, you can't buy everything you want, so you must make choices to buy one thing instead of another. If you walk into the store with $50 and the store offers you 500 different items, you're only going to walk out of that store with a cart full of stuff that totals $50. Scarcity always leads to choice, and people can actually make better decisions because they have a better understanding of how much each choice costs.

What is Economics?

So now that we understand what scarcity is all about, let's talk about what economics is. Economics is the social science that studies how people use scarce resources to satisfy unlimited needs and wants. You'll notice it's a social science because it's about how people interact and why they behave in certain ways. In some respects, it's a lot like psychology because we talk about and make decisions based on our understanding of why people do what they do.

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