Scarcity, Choice and Opportunity Cost

Scarcity and Wants

The basic economic problem arises because human wants are unlimited while the resources available to satisfy them are limited. This condition is called scarcity. Because resources such as time, money, land and labour are never enough to satisfy every want, scarcity exists in every society, rich or poor. Goods that are limited and require sacrifice to obtain are called economic goods, while goods available without limit such as air are called free goods. Because almost all goods are economic goods, the problem of scarcity is always present.

Wants differ from needs. Needs are goods essential for survival such as food, clothing and shelter, while wants are extra desires such as the latest smartphone model.

Choice and Opportunity Cost

Because resources are limited, we are forced to make a choice. When a choice is made, the best alternative that must be given up is called the opportunity cost. Opportunity cost is not measured in money alone but by the next best option sacrificed. This idea matters because it reminds us that "there is no free lunch" — every choice carries a hidden price in the form of the opportunity given up.

Opportunity cost is not faced by individuals alone. When a government with a limited budget chooses to build a hospital, the opportunity cost may be a school that must be postponed.

Factors of Production

The resources used to produce goods and services are called the factors of production:

• Land — all natural resources such as soil, water and minerals; its reward is rent.
• Labour — human physical and mental effort; its reward is wages.
• Capital — man-made goods used in production such as machinery; its reward is interest.
• Enterprise — the entrepreneur who combines the other factors and bears risk; its reward is profit.

The Production Possibility Idea

Because the factors of production are limited, a country cannot produce every good without limit. If more resources are used for one good, fewer remain for another. This shows that every economic decision involves an opportunity cost. When all factors of production are fully and efficiently used, the country is at its maximum production limit. Economic growth or new technology can widen this production capacity in the future.