Scarcity, Basic Economic Problem

Needs, Wants & Scarcity

Needs are essential goods which are required for human existence. Wants are luxuries which are desired but not essential.

People’s needs are also finite (shelter, water etc.) However, people have an infinite number of wants (CDs, healthcare, houses, swimming pools etc.) and given there is only limited resources we cannot fullfil all these wants.

There are literally not enough resources in the economy to make all the goods and services we desire; this problem is called scarcity – this is the basic economic problem, resulting in a choice having to be made.

What's the difference between wants and needs?

Your answer should include: luxuries / essentials

In your own words, summarise what the basic economic problem is.

Your answer should include: Scarcity / Choices / Opportunity / Cost

Positive vs Normative

Consumers, producers and governments all face choices and trade-offs. Choices often entail judgements which depend on opinion rather than established facts. When dealing with facts that can be tested we call it ‘positive statements’. Where judgements and opinions are involved, we call this ‘normative statements’.

The simplest way to think of positive and normative is that positive are objective statements whereas normative are value statements.

Opportunity Costs

_Opportunity Costs - ___cost of the next best alternative that has been sacrificed. Resources are scarce and choices must be made. Every spending decision has an OC.

Everyone has choices to make in life and OC is a key consideration when making spending decisions. E.g. your time and how you spend it is an OC – whether to stay in and study or go out and meet friends. In a business, a firm may have to decide which investment project to choose – a new computer system or a new delivery van.

Once the choice has been made the alternative has been sacrificed and will be the OC. For eg if you stay and study you have sacrificed (given up) the opportunity to go out. The OC is not meeting your friends. The idea of OC is useful in situations where the ultimate benefits of the spending decision maybe uncertain.

When a business start-up is being planned or product developments are in the making, there will be OC to consider. Going for one particular product means that it will not be possible also to develop the alternative. The OC will be the potential profits of the other product – which you did not choose.

Due to scarcity in the economy we all have to make choices:

1. Governments only have certain tax revenue to spend on the economy - e.g. spend on healthcare or defence?
2. Firms only have a certain amount of finance with which to invest - e.g. buy a new factory to expand production or researching new products?
3. Consumers only have a certain amount of income with which to spend/save - e.g. spend on TV or save for a holiday?

Trade-offs

Trade-offs_ – ___a __situation where having more of one thing leads to having less of another. It is linked to the concept of OC – though is more of a long term view.

We often think of OC in an “either or” situation. A trade-off involves a more gradual lessening of one variable in order to get more of another.

For eg if you face a simple choice between staying in on a Friday night or going out – your decision will involve OC. If you stay in the OC is not going out. However if you look at this choice throughout the year there is a trade off between the time you spend studying to get a good grade and the total time spent socialising. More time spent going out means less time with your books and not as good a grade (hint hint…)!

Businesses face trade-offs all the time, for eg a trade-off between money spent on developing new products and money spent promoting existing ones. The marketing budget for promotion will mean that more of one will mean less of the other. I.e. more money spent on developing and promoting a new product will mean less to spend on publicising an existing product – a trade-off. Market researchers will try to convince senior management which would be the best option!

Another example is when contemplating business start-up. There is a significant trade-off between working long hours to be successful and family/recreational activities.

What's the difference between the concepts of opportunity cost and trade off?

alternative