Scarcity: the root problem
The basic economic problem is that human wants are unlimited, but the resources available to satisfy those wants are limited. This gap is called scarcity. Because we cannot have everything we want, every individual, firm and government is forced to make choices about how to use resources.
Key idea
Scarcity means limited resources set against unlimited wants. It affects everyone at all times, even in a rich country.
Wants versus needs
A need is something essential for survival, such as food, water and shelter. A want is something that makes life more comfortable or enjoyable but is not essential, such as a holiday or a games console. Needs are limited, but wants are unlimited: as soon as one want is met, another appears.
Example
A family has a fixed weekly income. Buying more fresh vegetables leaves less money for entertainment. The income is scarce, so a choice must be made.
Choice and opportunity cost
Because resources are scarce, choosing one option means giving up another. The opportunity cost of a decision is the next best alternative that is given up. Economics studies how consumers, producers and governments make these choices to use scarce resources as well as possible.
Remember
- Scarcity = unlimited wants + limited resources.
- Scarcity forces choice; choice creates opportunity cost.
- Needs are essential; wants are unlimited.