Scarcity

Definition

Scarcity is the fundamental economic problem that arises from the fact that the resources available to meet human wants are limited. It refers to the gap between the unlimited wants of people and the limited resources available to satisfy those wants.

5 Must Know Facts For Your Next Test

1. Scarcity is the fundamental economic problem that all societies must address, regardless of their economic system.
2. Scarcity arises because human wants are unlimited, but the resources available to satisfy those wants are limited.
3. Scarcity forces individuals, firms, and societies to make choices about how to allocate their scarce resources.
4. The concept of scarcity is central to understanding how economies are organized and how individuals and societies make decisions.
5. Scarcity is the reason why economics is considered a social science that studies how people make choices under conditions of limited resources.

Review Questions

• Explain how the concept of scarcity is related to the field of economics and the way economies are organized.
  • The concept of scarcity is the foundation of economics, as it is the reason why economic decisions and choices must be made. Scarcity arises because human wants are unlimited, but the resources available to satisfy those wants are limited. This forces individuals, firms, and societies to make choices about how to allocate their scarce resources, which is the central focus of economic analysis. The way economies are organized, whether they are market-based, command-based, or a mix of the two, is largely determined by how they address the problem of scarcity and make decisions about resource allocation.
• Describe how the concept of scarcity relates to the production possibilities frontier and the choices individuals and societies must make.
  • The production possibilities frontier (PPF) is a graphical representation of the concept of scarcity. The PPF shows the maximum combinations of two goods or services that an economy can produce given its scarce resources and current production technology. The fact that the PPF is curved reflects the scarcity of resources, as producing more of one good means forgoing the production of another good. This scarcity forces individuals and societies to make tradeoffs and choices about how to allocate their limited resources, which is a fundamental aspect of economic decision-making. The choices made along the PPF reflect the opportunity costs associated with producing different combinations of goods and services.
• Analyze how the concept of scarcity relates to the economic approach of confronting objections and the role of marginal analysis in decision-making.
  • The concept of scarcity is central to the economic approach of confronting objections, which involves examining the opportunity costs and tradeoffs associated with different choices. Because resources are scarce, individuals and societies must make decisions that involve giving up one thing in order to get another. Marginal analysis, which examines the additional benefits and costs of an activity, is a key tool used in economic decision-making under conditions of scarcity. By considering the marginal costs and benefits of different choices, individuals and societies can make more informed decisions about how to allocate their scarce resources in a way that maximizes their overall well-being. The economic approach of confronting objections and the use of marginal analysis are both fundamentally rooted in the concept of scarcity and the need to make tradeoffs.

Related terms

Opportunity Cost: The cost of an activity measured in terms of the best alternative that is given up (not chosen).

Marginal Analysis: The examination of the additional benefits and costs of an activity, often used to determine optimal choices.

Tradeoffs: The need to give up one thing in order to get another, reflecting the scarcity of resources.