Scarcity, Choice and the Allocation of Resources

Scarcity, Choice and the Allocation of Resources

1. The world's resources are FINITE (limited)- i.e. there is a limited amount of land, water, oil on the planet

   • Therefore, resources are SCARCE (insufficient supply to meet demand)
     • Meaning economic agents (individuals, firms, governments) can only obtain limited amounts of resources at any time
       • Scarce resources are called ECONOMIC GOODS

2. Not all resources are scarce

   • Resources which are NOT SCARCE are called FREE GOODS
     • Examples: air
       • Population pressures diminish the amount of free goods

3. The basic economic problem

   • INFINITE WANTS
     • People have limited NEEDS which must be satisfied in order to survive
     • People have unlimited WANTS because we always want more of something to improve living standards
   • SCARCITY
     • Resources are scarce but wants are infinite.
       • This forces economic agents to make CHOICES and have to allocate scarce resources between competing uses
         • When a decision is made that affects the ALLOCATION OF RESOURCES, CHOICES are influenced by INCENTIVES (e.g. bribery)
   • OPPORTUNITY COST
     • CHOICES can be grade in terms of benefits gained from each alternative
       • One choice will be the 'best' so a rational economic agent will take that alternative
         • The benefit lost from the NEXT BEST ALTERNATIVE=OPPORTUNITY COST
           • Free goods have no opportunity cost