What is the Basic Economic Problem of Scarcity?

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  • 0:02 Basic Problem of Scarcity
  • 1:14 Scarce Goods & Services
  • 3:16 Graph Illustrating Scarcity
  • 4:47 Lesson Summary
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Lesson Transcript
Kallie Wells
Expert Contributor
Joseph Shinn

Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.

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. Through this lesson, you will gain a better understanding of the concept of scarcity and why it forces us to make decisions and trade-offs everyday.

The Basic Problem - Scarcity

Scarcity, or limited resources, is one of the most basic economic problems we face. We run into scarcity because while resources are limited, we are a society with unlimited wants. 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.

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 was forgone?

Scarce Goods and Services

As noted, 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 consume as individuals, or as a society, costs something and is scarce. By consuming one good, another good is foregone. Therefore, scarcity creates a need for 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 scarce than another, either because of limited resources or higher want (demand) for that good.

Let's 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 chickens is less limiting. Even though the resources to produce both are limited, there is much more labor and capital available to produce chicken meat than shark meat. Not to mention the quantity of sharks is also much more limited than that of chickens. Factors like production costs and labor affect the cost of scarce items.

If the unlimited wants and needs of a particular good can be met by resources, then it is not considered scarce. This would require the resources to be unlimited as well for it to meet unlimited demand. What is 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 not scarce. It is a good that everyone has unlimited access to, and no one has to pay to consume it!

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Additional Activities

Examples of Scarcity

Do the following examples describe a situation where scarcity is an issue? Why or why not? In providing your explanation, you should also discuss what is scarce (ie time, money, production resources).

  • A firm produces both pens and pencils. In the market for pencils. The demand for pencils increases, which causes the price of pencils to rise, making this product more profitable. As a result of this, the firm wants to produce more pencils. However, because there is a fixed amount of capital to produce both pens and pencils the firm can only produce more pencils by reducing their production of pens.
  • Fred wants to ride his bike to the convenience store for snacks, he has enough time to get there and back so he hops on his bike and goes.
  • A college student wants to go to movies AND out to dinner with friends. After looking at his budget, however, he realized that he can't afford both, so he decides to go to dinner with friends.
  • A colleague of yours is complaining that your boss wants him to complete two projects, but he can't get both done in time. Project A will take 30 hours to complete while project B will take 35 hours to complete. Assuming a 40-hour workweek, there is no way that your colleague can complete both projects in time.
  • Nikki and her friends won a radio station promotion and free tickets to see Molly G, the famous rapper. When they get to the box office the concert is sold out.

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