Scarcity, Choice and the Allocation of Resources

The world's resources are FINITE (limited)- i.e. there is a limited amount of land, water, oil on the planet
1. Therefore, resources are SCARCE (insufficient supply to meet demand)
  1. Meaning economic agents (individuals, firms, governments) can only obtain limited amounts of resources at any time
    1. Scarce resources are called ECONOMIC GOODS
Not all resources are scarce
1. Resources which are NOT SCARCE are called FREE GOODS
  1. Examples: air
    1. Population pressures diminish the amount of free goods
The basic economic problem
1. INFINITE WANTS
  1. People have limited NEEDS which must be satisfied in order to survive
  2. People have unlimited WANTS because we always want more of something to improve living standards
2. SCARCITY
  1. Resources are scarce but wants are infinite.
    1. This forces economic agents to make CHOICES and have to allocate scarce resources between competing uses
      1. When a decision is made that affects the ALLOCATION OF RESOURCES, CHOICES are influenced by INCENTIVES (e.g. bribery)
3. OPPORTUNITY COST
  1. CHOICES can be grade in terms of benefits gained from each alternative
    1. One choice will be the 'best' so a rational economic agent will take that alternative
      1. The benefit lost from the NEXT BEST ALTERNATIVE=OPPORTUNITY COST
        Free goods have no opportunity cost

Resource summary

	Created by beth2384 over 10 years ago