Scarcity, Choice and Opportunity Cost
Scarcity
- Scarcity refers to the basic economic problem: the gap between limited resources and theoretically limitless wants.
- This situation requires people to take decisions about how to allocate and use resources efficiently.
- It ensures that resources are used to best effect.
- All goods and services are scarce because resources are limited.
- Scarcity forces choices in how resources are allocated.
Choice
- Choice refers to the decisions individuals, businesses and governments make about how to best allocate resources.
- We must make choices about the uses of resources because there is a limit to the amount of resources that can be produced.
- Due to scarcity, choices must be made.
- Every choice has a cost (opportunity cost).
Opportunity Cost
- Opportunity Cost is what you have to give up in order to get something. The concept of opportunity cost allows us to examine the true cost of making one choice over another.
- It is also referred to as economic cost.
- It is integral to the study of economics since every decision we make requires a trade-off.
- Often there is no 'right' choice, but rather some choices that are better than others depending on what a individual or society values.
- Opportunity cost can be measured in non-monetary terms. For example, the opportunity cost of deciding not to work an extra hour is the lost wages that could have been earned.
Example of Scarcity, Choice and Opportunity Cost
- Suppose the government has £10 million that it could either invest in healthcare or education.
- The opportunity cost of deciding to invest in healthcare is the foregone benefits to society from improved education.
- This example demonstrates the principle of scarcity (limited money to invest), the need for choice (healthcare or education), and the concept of opportunity cost (benefits of education forgone).