Scarcity, choice and resource allocation
– Meaning of scarcity and the inevitability of choices at all levels (individual, firms, governments) – Opportunity cost
– Basic questions of what will be produced, how and for whom Unlimited Wants
Human beings, in order to survive need a lot of things. Some of these things are very important for our existence. For example, food, clothing, water, shelter and air. These things can be classified as Needs. Apart from this there are things which are needed by us but they are not important for our survival and we can live without them also. For example, going on an expensive holiday, owning a 57 inches Plasma TV. These are known as Wants. This list is never ending and is continuously increasing.
On the other hand, we have limited resources to produce these goods and services we want. There are not enough car factories to provide cars to everybody on earth. Everything on this planet has some limits except for our Wants. When unlimited wants meet limited resources, it is known as Scarcity.
The Economic Problem of Scarcity
The fundamental problem of economics is that we have unlimited wants, but limited resources to satisfy these wants. When wants exceed the resources available we have scarcity. Scarcity occurs because human wants exceed the limits of available resources. Economics deals with the basic fact that scarcity exists in our everyday lives and in our economy. Resources such as raw materials are in finite supply and must be allocated to their best use. Virtually all resources are scarce, meaning that more of them are desired than is available. Economics is concerned with the way people have to make choices in order to overcome the problems of scarcity.
Inevitability of choices
Each and every level of economic agent (individuals, firms or government) have to make the choices as all of them are confronted with central economic problem (scarcity). Government have to decide on the best possible way to allocate resources (where and what kinds of factories should be build), the firms have to decide how to maximize profit (what is the most efficient way to produce goods) and individual have to decide how to maximize their welfare (which goods will give them most satisfaction). In the process of this choice they have to give up other alternative so the concept of opportunity cost also implies in each and every level of economic agents. Opportunity Cost
The relevant cost of any decision is its opportunity cost - the value of the next-best alternative that is given up. This will mean that if we choose more of one thing, we will have to have less of something else. Economists use the term opportunity cost to explain this behaviour. The opportunity cost of any action is the value of the next best alternative forgone. By making choices in how we use our time and spend our money we give something up. Instead of following the economics classs, what else could you be doing? Your best alternatives may involve sports, leisure, work, entertainment, and more. Thus, the concept of opportunity cost is your best alternative to the choice that is made. If you choose to go to a restaurant this evening, the money that you spend on dinner will not be available for other uses, even saving.
Businesses and governments also deal with opportunity costs. Businesses must choose what type of goods to produce and the quantity. Given limited funds, the opportunity cost of producing one type of good will arise from not being able to produce another.
Opportunity cost in economics refers to the value of second best alternative forgone or given up. Simply put, lets assume that when you get up in the morning you have two options, going to the classes or sleeping late in the warm cozy bed. And if you decide to go to class anyhow, your opportunity cost would be the benefits you would have obtained by sleeping in the warm cozy bed. Opportunity cost is the...