Chapter 1: The nature of the economic problem
The economic problem of scarcity lies at the core of economics, representing the fundamental
challenge of satisfying unlimited wants with limited resources.
Definition of Scarcity- Scarcity refers to the situation where human wants exceed the resources available
to fulfill those wants. It is a pervasive condition in all societies, regardless of their level of development
or abundance of resources.
Different reasons why scarcity exists:
1. Limited Resources:
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Resources such as land, labor, capital, and entrepreneurship are finite. They cannot
satisfy all human desires simultaneously.
•
Even abundant resources become scarce when the demand for them surpasses their
availability.
2. Unlimited Wants:
•
Human desires for goods and services are virtually limitless. People always seek to
improve their standard of living, pursue leisure activities, and satisfy various needs
and wants.
•
Advancements in technology and innovation continually introduce new goods and
services, further expanding the range of desires.
3. Necessity of Choice:
•
Scarcity in resources gives a need to make choices. Individuals, businesses, and
governments must make decisions on how to allocate limited resources among
various wants.
•
Every decision to allocate resources to one purpose implies sacrificing the opportunity
to use those resources for another purpose, creating opportunity costs.
4. Allocation Mechanisms:
Various allocation mechanisms exist, including market allocation, command allocation
(central planning), and mixed allocation (a combination of market and command
systems).
Each mechanism has its advantages and disadvantages in addressing the economic
problem of scarcity.
Understanding scarcity is essential for designing effective economic policies and
improving societal welfare amidst finite resources and unlimited human wants.
Economic Goods:
Economic goods that are scarce in nature and have a positive economic value. They are goods
for which people are willing to pay a price because they provide utility or satisfaction.