Economics Essay On Scarcity 1e1u4w

Rayden Tan 15S07A 1a) what is meant by the basic economic problem of scarcity? -

Define scarcity Elaborate on the problem of scarcity Explain the self-interested nature of economic agents Explain the choices that economic agents and economies have to make. Explain the analytical tools used by economic agents in making rational choices

All societies face the basic problem of scarcity. Scarcity makes it necessary for us to make the most of what we have. In economics, scarcity refers to limitations. For example, insufficient resources, goods, or ‘alternatives is fundamental to economics. Scarcity happens because there are unlimited wants and limited resources. Because of scarcity, choices have to be made by consumers, businesses and governments. For example, over six million people travel into London each day and they make choices about when to travel, whether to use the bus, the tube, to walk or to cycle, or whether to work from home. Assuming rational behavior on the part of decision-making units, like households, firms and the government, this optimal choice must be one that chooses the most desirable alternative among the possibilities that the available resources permit. That is, decisionmaking units will always choose the alternative which yields them maximum satisfaction. Households, with a limited income, have to decide the combination of goods and services (holidays, food etc.) to purchase which yields the highest utility. Firms, with limited factors of production, have to decide what goods and services to produce and which method of production to adopt to yield the highest profits. Governments with limited tax revenue, have to decide what projects and initiatives to undertake to maximize society’s welfare. The choices they have to make are related to the self-interested nature of economic agents. All societies face the problem of scarcity and hence have to make decisions like a household does. A society has to decide what and how much to produce, how to produce and for whom to produce. The society must decide what goods it is going to produce. Such choices usually take the form of more of one thing and less of another, rather than all of one and none of another. It needs to choose the composition of total output. Most goods can be produced by a variety of methods. Wheat can be grown by making use of much labor and little capital, or by using vast amounts of capital and very little labor. A society must decide on the methods of production to be adopted.

Making a choice made normally involves an opportunity cost, this means that choosing more of one thing can only be achieved by giving up something else in exchange. When a choice is made, all other alternatives must be forgone. Opportunity cost is involved. Opportunity cost refers to the real cost in of the next best alternative that has to be

forgone. It arises due to the fact that the resources available to meet the wants are limited so that all wants cannot be satisfied. To obtain the highest level of satisfaction, a rational decision must be made. This decision has to be an optimal one. Making choices is necessary to everyone in our roles as consumers, producers or government. Economic choices are made at the margin. The margin is the edge or border where we must decide whether to take one more step, whether to purchase one more unity of a particular good or whether to use one more unit of a particular resource. Marginal analysis helps students allocate study time and workers allocate work time among a number of tasks. Consumers use marginal analysis when buying. We spend on one item until the benefits gained from spending one more dollar are less than the benefits from spending that dollar on something else. Consumers will consume until MPB (marginal private benefit) is equal to MPC (marginal private cost). If MPB is more than MPC, it is rational to choose to consume more of that good. Business firms use marginal analysis to decide the level of production, e.g. a barber keeps his shop open until one more hour brings in less revenue than the cost of staying open. In effect, our entire economic system makes decisions at the margin. We increase production until one more unit of output is valued by households less than the resources than the resources required to produce it. In this way, we help ensure that our scarce resources are used to produce the things we want most. Given the problem of scarcity, it is of utmost importance that limited resources are efficiently utilized to meet the unlimited wants of people as best as possible. A Production Possibility Curve (PPC) is a graph that shows that maximum attainable combinations of output that can be produced in an economy within a specified period of time, when all the available resources are fully and efficiently employed, at a given state of technology. The PPC is an economic framework that can be used to illustrate concepts of scarcity, choices and opportunity cost. Scarcity is illustrated by the unattainable combinations outside the PPC as well as the fact that society has to choose among combinations of the two goods as resources cannot be used to produce all at the same time. The downward slope of the PPC illustrates the concept of opportunity cost. To choose to have more of one good means having to give up some of the other good, given that the limited amount of resources have been fully and efficiently employed. As more of a good is produced, larger and larger quantities of the alternative good must be sacrificed. There is increasing opportunity cost in the production of consumption goods in of capital goods foregone. This is because the resources in the economy are not perfectly suitable to the production of both goods. Shifts in the PPC also illustrate economic growth. An increase in the amount or quality of resources enables the economy to produce more than before, thus resulting in a shift in the PPC outwards. Technological improvement also causes the PPC to shift outwards. The PPC is able to allow the economic agents to view the overall aspect of the economy, whether it has experienced economic growth, or whether maximum satisfaction has been obtained.