Economics is about Scarcity and Choice
Economics is defined as the study of rational choices made under the conditions of scarcity. A simple choice in economic model may be a situation where an individual makes choice between going to dinner and seeing a movie. Scarcity means that the amount of production factors is insufficient to satisfy the desire of many users. Scarcity therefore means that supply is low and this results to high demand. Production factors such as land, labour and capital used to produce goods and services for the needs of the society are usually insufficient. Low supply which is termed as scarcity raises demand thus leading to increased cost. Higher cost make an appeal to suppliers to produce more and this makes cost to be normal (Stroup, 2003, p.17). The most affected by insufficient production factors are individuals and society as a whole.
Individuals have limited income, time and ability that avoids such people from having what they like. As a society the major problem is that of limited resources such as man power, natural resources and machinery. This fixes a maximum amount of goods and services produced at any given level of production. Limited production inputs makes consumers, organisations and the country subject to making rational choices.
Scarcity requires individuals and society to make choices in relation to these limited production factors. The choices made leaves individuals desire partially satisfied and on the other hand unsatisfied. Scarcity forces individuals to take less than what they desire. Economics is related to scarcity in that any economic activity cannot exist without scarcity forcing individuals to make choices. In the event of scarcity and choice, there is opportunity cost. This is the cost of the next best foregone opportunity. In other words opportunity cost is the true cost of a scarce resource in the market due to limited production inputs. For example, when a person has two options A and B he or she is supposed to compare the benefits of option A with that of B and choose the option with highest benefit (Stevens, 1993, p.25). In economics, three basic questions should be answered in relation to scarcity and choice. These questions include
What to produce
How much to produce
How to produce
The economy addresses issues of efficient utilization of resources. The combination of goods and services to be produced with limited production inputs. Another concept of economics as a concept of scarcity and choice is the manner in which goods and services are distributed to each individual.
Another element of economics is production possibilities frontier that shows trade off in the use of production factors. Any given country is blessed with particular quality and quantity of natural resources, land and labour. Different resources make countries to decide between the different combination of resources used to produce goods and services (Vanberg, 1994, p.28). The level at which goods and services are produced is a measure on whether demand for goods and services is adequate. The type of goods to be produced from the limited resources is related to opportunity cost.
A good illustration to show how production depends on opportunity cost is in a situation in which more of product X is produced and less of Y. The numerical value is defined by reduced production of product Y divided by increased production of good X. When the ratio is more than unity, the choice of producing additional amount of good X becomes expensive. On the other hand, when the ratio is equal to 0.3 the cost of producing good X decreases.
The combination of the three elements in economics that is scarcity, choice and opportunity cost is represented in Production Possibilities Model. The model is a reflection of curve which is usually a frontier or boundary. The model describes combinations of output in production of two goods say X and Y produced under the condition of scarce factors of production. Position of production possibilities curve is an indication of maximum amount of output combinations available (Geoffrey, 1999, p.21). A production possibilities curve close to the origin signifies that resources are very scarce. On the other hand, when the production possibilities curve is distant from zero it signifies that there is less scarcity.
Given country A has a given amount of capital and fixed quantity of labour as factors of production. Another country B has different production inputs. The two inputs can be represented in a production possibilities frontier to show scarcity and implications of choice. This is represented in the diagram below
Production possibilities frontier
SHAPE MERGEFORMAT Country A has higher number of labour units while country B has higher number of capital units as is observed from the diagram. When the two countries decide to use one factor of production country A will use 300 units of labour while country B will use 300 units of capital. This is an indication of trade off between the two countries in the use of production factors. To achieve the same level of out put in the two countries, they have to make a choice on the number of labour and capital units to use respectively (Vanberg, 1994, p.46).
The level of output along production possibilities frontier does not change but what actually changes is the use of production factors. Efficiency and production possibilities frontier are related in that every point on the production possibilities is considered to be efficient. Any point outside the production possibilities frontier is taken to be inefficient. However, one weakness of production possibilities curve is that it does not tell the best point in which production can take place in a situation of scarce resources.
Opportunity cost in this economic assumption represents the number of labour or capital each country decides to avoid using in order to employ other production inputs. This change results to technical rate of transformation and is a representation of the available technology in a country that allows the changes in the use of production inputs. This is due to an increase in the use of other factors of production in the process of producing goods and services for country A and B. Opportunity cost in the case of an individual represents the value of the best foregone alternative activity or item.
Economy is a matter of scarcity and choice in that in any given country the economy can produce to a given limit. The limit is technological, information, natural resources or organisation. All these elements in an organisation or country are usually limited and choices must be made to sustain the demand of the market. Consumers are supposed to make choices in grocery store, while purchasing cars and in any other form of economic activity (Stevens, 1993, p.60). These activities contribute to a complex economic process that is related to scarcity and implications of making choices.
The issue of scarcity is the major element that leads to creation of a balanced market structure that obeys the law of demand and supply. Making a choice in a given span of opportunities may be difficult but a consumer is guided by the best opportunity. When the benefits in one opportunity are high, the consumer cannot avoid such opportunity. It is a phenomenon in which every economic activity should undergo so as to develop an option of balance in consumers satisfaction.
The concept of efficiency in economics is the best element that saves country and individuals from exploitation of limited resources. Economics supports the principle of minimising wastage of limited resources. All available resources should be utilised inn an efficient manner to avoid wastage. To control this, organisations are supposed to assign production inputs in the right channel of production or task (Geoffrey, 1999, p.52). Resources should be employed fully in specific areas of production so as to avoid wastage of resources. One element through which the concept of efficiency in scarce resources can be achieved is through competition. Through competition all production inputs are put into use and none is wasted.