Scarcity: The Economic Problem

Scarcity refers to the limitations on obtaining all the goods and services that people want. Scarcity is considered the economic problem since it gives rise to the trillions of economic problems experienced by people everywhere. Most economists believe that scarcity of the goods and services that people want is unavoidable.

Goods and services are considered scarce whenever people want more of a good or service than is available to them at a price of zero. They are scarce because the ingredients necessary to produce them, called resources, or factors of production, are scarce.

Resources, or factors of production, are divided into three broad categories: (a) labor resources, (b) natural resources, and (c) capital resources On closer examination, it becomes clear that the productive ability of any one of these re sources depends very much on the quantity and quality of the other resources.

Whenever resources are scarce, the decision to produce or consume something involves an opportunity cost. Opportunity cost-that which is given up-can be seen as the true cost of choosing a particular alternative.

People face an opportunity cost in allocating their limited incomes as well as their time and effort Government, too, must make choices; the opportunity cost of certain programs may be other programs, or it may be private sector spending.

Opportunity cost in production may be applied to a single firm or to an entire economy. In both cases it can be incorporated into a production possibilities boundary-a curve that shows all the alternative maximum combinations that can be produced with a given supply of resources including technological knowledge.

Production possibilities are expected to reflect increasing marginal opportunity costs. This means that the more units of a good or service that are produced, the higher the opportunity cost of producing even more units. The reason is that re sources are generally not equally well suited for producing all kinds of goods or services.

A business firm or a country cannot pro duce amounts that are beyond its production possibilities boundary. It may, however, produce below the boundary. When it does so, it is either not using all of its resources or using them in an inefficient way.

Over time, production possibilities bound aries may shift outward or inward. It is more likely that the shift will be outward, reflecting an increase in resources including technological know-how. There will be an inward shift when fewer resources are available for production.