Scarcity, choice and opportunity cost
Understanding Scarcity
- Scarcity pertains to the fundamental problem of economics: the basic economic problem of having unlimited human wants, but limited resources.
- It is the situation where finite resources are inadequate to fulfil all human needs and wants.
- This concept applies to all sectors of an economy and could be a result of factors such as physical shortages, production issues, or environmental factors.
Concept of Choice
- Choice involves making a decision when faced with two or more possibilities.
- In the context of scarcity, making choices is necessary as resources are limited.
- The concept of choice applies when deciding how to allocate these scant resources among various possible uses.
- It is important in economics because it distributes scarce resources to satisfy the highest number of wants and needs.
Understanding Opportunity Cost
- The opportunity cost is the cost of the next best alternative foregone when a choice is made.
- Not only monetary or physical goods constitute the opportunity cost but any valuable factor which is forfeited.
- It is a fundamental concept that underlies all decisions in economics.
- Opportunity cost is not always measured in terms of money. It can be measured in terms of anything which holds value, including time, leisure, or anything else that provides utility.
Relationship between Scarcity, Choice and Opportunity Cost
- Scarcity, choice, and opportunity cost are interrelated key concepts in economics.
- Scarcity requires choices to be made, and these choices come with associated opportunity costs.
- For example, a government may choose to allocate more funds into healthcare (choice) due to a scarcity of well-equipped hospitals. However, this comes with the opportunity cost which could be investing those funds in improving education.
- Understanding this relationship is paramount to understanding the basic principles behind economic decisions and policies.