Scarcity is the situation where there are unlimited wants and needs but there are only limited resources.
We constantly want more, and when we get it we just want a bit more. These goods and services that we want are produced by resources. While most of our basic human needs- food, water, shelter, housing and clothing can be satisfied with the resources. Our wants for better things cannot all be satisfied.
Here lies the basic economic problem- how do we use our limited resources to fulfill our infinite wants and needs?
Because of scarce resources, we need to make decisions on how to use them, we need to make choices.
A choice is a decision to use a scarce resource between competing uses.
When we make a choice an opportunity cost is immediately created.
An opportunity cost refers to the next best alternative forgone
Let’s look at an example!
A large piece of land can be used to build a shopping mall or a hospital.
Scarcity- a limited resource of land has numerous uses.
A decision is made to build a hospital- choice. An opportunity cost then created, the forgone shopping mall.
If you do AS or above, find the post on production possibilities frontiers where these concepts are displayed graphically.
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