The concept of scarcity central to the study of economics
Resources used in the production process determine the price of commodity in the market. Therefore, when a particular resource is limited or is in short supply, it adds the value of a product. Scarcity of resources occurs when the demand of human wants exceed the supply of products. In addition, the nature of individuals to want more and more leads to unlimited supply of goods and services (Howirtz, 2000, p.14). Another concept that arises as a result of scarcity is the issue of choice. Once the resources are scarce, individuals have to make relevant choices as per the preference of needs and wants.
In an environment of scarcity, an individual is supposed to make decisions that compare costs and benefits of taking one opportunity and ignoring the other. The concept of opportunity cost thus arises in an environment of resource scarcity. Scarcity of resources necessitates trade-offs which results in an opportunity cost. Opportunity cost in terms of economy is defined as the next best foregone alternative (Snowdown, Vane, 1997, p.16). In an environment of scarce resources, every individual is supposed to make decisions on how best one is supposed to use limited means in pursuit of unlimited resources.
Scarcity is the most important and central concept of economics which is defined as the allocation of resources among competing ends. Scarcity therefore means an economic situation in which the supply of resources is not sufficient. Once an economy is faced with insufficient supply, the demand of goods and services in the market is never met. In a wide concept of society, scarcity implies that an economy is not in a position of attaining societys goals. This means that there is an imbalance in trade off on one good against others. Factors of production such as capital, land and entrepreneur in economics are the basics of providing resources. Scarcity of resources therefore is defined as the difference between the desire and demand of goods (Underwood, 2004, p.127). A good is said to be scarce if people consume more of such good if it was provided free of charge.
Scarcity is important in economics because it defines the availability of resources which cannot meet the ever rising demand of goods and services. Scarcity is based on the concept of limited supply of needs and wants against increased demand of goods and services. It is a central concept of economics in that, proper measures of resource distribution and utilization should be adopted to avoid inefficiency. Goods and services are usually scarce because people desire more than can be offered by the factors of production.
Scarcity can be artificial in the case of poor planning and execution of utilization ideas. Other factors that create scarcity of resources include limited supply of resources, human skill and technology capabilities. It is a fact that scarcity is an economic situation that should be dealt with accordingly. Scarcity therefore can be managed by making choices in relation to value so as to allow individuals exchange resources through proper trade (Ahiakpor, 2003, p.42). In ideal situations, pricing systems adjust in a proper manner thus leading to a balance of supply and demand. Once the demand and supply of goods and services is equal, a neutral economic situation is created. However, it is hard to achieve an equilibrium market situation due to forces within the market.
Limited availability of resources that is, the factors of production, limited technology and management skills determines the location of societys production possibilities curve. Inappropriate employment of production factors leads to a limitation in the level of production. In such a situation, the economy operates below its production possibilities curve or frontier. When an economy is not in a position of abolishing the inefficiencies of limited resources, it creates artificial scarcity. The society is forced to make proper decisions on how to allocate and use goods and services when supply of resources is insufficient (Akerlof, 2003, p.5). The production possibilities frontier is a good illustration on how societies are supposed to optimally allocate resources.
Production Possibilities Frontier (PPF)
Production Possibilities Frontier (PPF) is a graphical representation that shows the maximum combinations of two goods produced during a time period given fixed resources and technology. The curve is used to illustrate certain economic concepts such as opportunity costs and production efficiency. It is a representation of making efficient use of available limited resources. The shape of production possibilities curve is usually concave to the origin because of the extra output that results from allocating more resources to a particular good may fall.
An efficient production point represents maximum combination of outputs given resources and technology. An efficient economy is the one that produces a combination of goods and services that meet customer needs. Points that lie on the production possibilities curve are efficient because they raise the output of goods and improve economic welfare. Points inside the possibilities production curve are productively inefficient (Britton, 2002, p.32). Points outside the curve are infeasible for any given resources and cannot be attained in the short run.
In the context of production frontier, the shape of the curve is directly related to opportunity cost. The PPF in the concept of opportunity cost can be described in a situation whereby there is an increase in productive resources that leads to increased production of first good that entails decreasing production of a second good. This is because resources should be transferred to the first good and away from the second good.
Production Possibilities Frontier
In the above figure, the points along the curve describe trade-off between production of tea and coffee. The sacrifice made in production of coffee is called opportunity cost. This is because increased production of tea means loosing the opportunity to produce certain amount of coffee. In this case, opportunity cost is measured in the number of units that will be foregone when additional unit of tea is made.
The day to day life of human beings is full of decisions made as a result of limited resources. A person makes decisions according to the surrounding environment. For instance, an individual may decide to cook food instead of eating in a hotel. This is associated with the scarcity of resources that makes individuals to make choices. Scarcity therefore is a concept of economics that tries to explain the reason of having insufficient resources. This results to the concept of opportunity cost which is the central theme of economics and scarcity. Institutions through their management make decisions in their daily activities (Snowdown, Vane, 1997, p.23). Government also makes decision every day and the decisions made are accompanied by opportunity cost. Scarcity is an aspect that cannot be avoided by human beings as long as they use goods and services.
The concept of scarcity in another perspective relates to a situation of defining an economic good. Economists define the quality of a good in the essence of scarcity whereby the factor of a commodity being scarce or not determines whether something is or not an economic good. An economic good has value due to its scarcity because goods that are freely available have no value and hence cannot be classified as economic goods (Underwood, 2004, p.136). The concept of scarcity is central to economics because it helps to determine the value of an economic good.
Scarcity affects individuals in respect to choices they make on how to use limited resources to satisfy their needs. This entirely affects the economy both in positive and negative aspects. When the resources are few, individuals are entitled to make decisions that correspond to insufficient supply of resources. The question of cost is replicated in the concept of scarcity which forces individuals to make choices about proper use of production factors. The limited resources should be allocated in a more efficient manner so as to maximize on returns.
Individuals usually want more than the economy can offer as a result of scarcity. In addition, individuals use resources in inappropriate manner which results to scarcity. The economy as a whole in such situations is affected by the aspect of failing to meet consumer needs. Scarcity affects the economy in a positive way through various measures that forces individuals to make the right choices. For instance, unemployment is one major problem that is created as a result of scarcity. This makes individuals to employ fewer finances in purchasing commodities that are scarce at high prices (Britton, 2002, p.39). In return, business operators will have fewer returns due to low purchasing patterns of consumers.
The economy therefore is adversely affected due to poor returns and insufficient supply of goods and services. In order for an economy to perform well, a balance should be maintained between demand and aggregate supply of goods and services. Scarcity therefore, can result to a micro economic problem which is a threat to economic development in any given country. The concept of demand and supply is the basis upon which many individuals base their plans on how to spend (Ahiakpor, 2003, p.65).
Conclusion
The forces of market demand and supply determines the price of commodities. When the demand is high and supply is low the price of the commodity rises. While when the demand is low and supply is high commodity prices are usually low. This is a concept that determines pricing model in the market place and thus the purchasing behavior of customers. The economy is therefore determined by individual purchasing behavior. The concept of scarcity affects individuals in various matters of economy that relates with opportunity cost.