Basics of Economic Problem

• Scarcity refers to the basic economic problem, the gap between limited resources and theoretically limitless wants.
• This situation requires people to make decisions about how to allocate resources efficiently, in order to satisfy basic needs and as many additional wants as possible.
• Choice is the process of deciding which want, among numerous possibilities, will be satisfied using the available resources.

Concept of Opportunity Cost

• Opportunity cost is the value of the next best alternative forgone, when an economic decision is made.
• It's a key concept in economics because it implies the cost of making a specific choice in terms of the option or options that are forgone.
• In other words, opportunity cost is the value of what could have been achieved if you had made a different decision.

Consequences of Scarcity

• Because of scarcity, choices must be made by consumers, businesses and governments.
• For businesses, decisions about what to produce, how to produce and for whom to produce need to be made.
• Governments must decide on how to allocate public resources (eg. health care, education) and how to distribute income.
• Consumers must make decisions about what to buy and in what quantities, given their limited income.

Applications of Opportunity Cost

• Opportunity cost sets up the basic principles of economics: tradeoffs and scarcity. It can be applied to decisions making process at all levels, including personal finance, production decisions of a business, and policy decisions by government.
• For example, for a student, the opportunity cost of choosing to study would be the time that could be spent with friends, working, or sleeping etc.
• Within a business, understanding the opportunity cost of choosing one investment over another can help to inform decisions on the allocation of resources.

Resource Allocation

• With scarcity always present, choices and trade-offs are made, which leads to the issue of resource allocation. This shows how a society or individual assigns its scarce resources among alternatives.
• An example may be the trade-off between producing one type of good or another, or between consuming and saving, etc.
• Economists aim to solve the problem of scarcity by allocating resources in the most efficient way possible. They undertake this through the analysis of choices and trade-offs and by making decision based on opportunity cost.