SCARCITY AND THE ECONOMIC PROBLEM AND OPPORTUNITY COST

SCARCITY

There are only a limited amount of resources on the planet, e.g.:
•  gold.
•  fish.
•  trees.
•  oil.


Economists describe these resources as being scarce and call them
economic goods. Not all resources are scarce, these are called free goods,
e.g.:
•  air.
•  seawater

INFINITE WANTS

Humans have a minimum level of needs which are necessary for survival,
food, shelter, heat and clothing. Despite this people would rather enjoy a
higher standard of living, this is because we all have an unlimited number of
wants, e.g.:
•  cars.
•  houses.
•  holidays


THE ECONOMIC PROBLEM
The fact that resources are scarce and our wants are infinite gives rise to the
basic economic problem. How do we decide to allocate the limited resources?
Economic agents (individuals, firms, governments etc.) have to make choices
regarding what to do with their limited resources.


OPPORTUNITY COST
Due to the existence of the economic problem economic agents are forced to
make choices regarding how resources are to be allocated.
You have £40, do you spend it on a t-shirt or a night out? Does the
government spend £100 million on healthcare or weapons?
A rational economic agent will choose whatever gives them the greatest
amount of satisfaction (economists call this utility).
The utility you lose from not being able to have your next best alternative (the
second choice) is called the opportunity cost. If you spend £40 on a night out
the opportunity cost will be the t-shirt. If the government spends £100 million
on weapons the opportunity cost will be healthcare. If a school decides to
spend £1,000 on a new computer the opportunity cost will be 20 tables.