Principles of Economics/Scarcity

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Scarcity is the fact of human existence that states scarce resources make it impossible to satisfy our unlimited wants. To put it differently, the limited number of resources we have cannot possibly satisfy our unlimited desires. It is due to this basic fact of human existence that we must base our decisions around this cost.

Importance: Influence on Other Concepts[edit]

Scarcity influences almost every aspect of economics. In fact, if scarcity did not exist, the field of economics would not exist either. The following sections below, while not comprehensive, exist thanks to scarcity. Note: by no means is the list below complete.

Opportunity Cost and Trade-off[edit]

(For more information, go to this page: [insert page here]) Scarcity is the reason we have to trade-off resources. A trade-off is simply the idea that we must give-up some resource (e.g. our time) to obtain a resource we want. The opportunity cost is simply adding numerical values to what we must give up. It is for this reason that humans will examine what they must give up in order to obtain a resource. For example, if you want to choose between 2 scoops of chocolate ice cream OR 1 scoop of vanilla ice cream, you are going to have to sacrifice one choice over the other. If you choose the 2 scoops of chocolate ice cream, you are losing on the opportunity of getting 1 scoop of vanilla ice cream. However, if you choose the 1 scoop of vanilla ice cream, you are losing on the opportunity of getting 2 scoops of chocolate ice cream. It is clear that whatever you lose out on is the opportunity cost of your choice. Choosing the 2 scoops of chocolate ice cream means lost the chance to get the 1 scoop of vanilla ice cream. This means the opportunity cost for when you select 2 scoops of chocolate ice cream is the 1 scoop of vanilla ice cream (what you did not obtain).

1

Easy Question: You can choose between having 15 cookies or 2 cakes. If you choose to have the 2 cakes, what is your opportunity cost?

15 cookies
2 cakes

2

Hard Question: You work for a company called Lightbulb. You work for 40 hours a week and earn $22.51 per hour. Another company, BulbLight, offers you another job for 40 hours a week for $25.51 per hour. What is the opportunity cost of working with BulbLight instead of Lightbulb?

$

(make your answer into a decimal) is your opportunity cost.


Rationality[edit]

Scarcity is the reason we have rationality. Rationality is the idea that people will do a cost-benefit analysis that determines if that particular person is satisfied with their benefits exceeding their costs. For example, if you wanted to choose between 2 scoops of chocolate ice cream OR 1 scoop of vanilla ice cream, there are many ways in which one person might benefit:

  • One particular person cares more for chocolate than vanilla. As such, that particular person will choose the 2 scoops of chocolate ice cream.
  • Another particular person cares more for vanilla than chocolate. As such, that particular person will choose the 1 scoop of vanilla ice cream.
  • A third particular person does not have a preference between vanilla or chocolate. As such, that third particular person will either do mathematical reasoning or simply choose at random.

Law of Demand[edit]

The law of demand simply states that a price increase for a particular good (i.e. one item or service a person may purchase) will result in a lower quantity demanded (i.e. the amount of a good people will want). Since scarcity influences the opportunity cost, when the price increases for a good, the opportunity cost increases for that buyer. In that manner, scarcity influences the law of demand. For more information on law of demand, go to the corresponding page.

Conclusion[edit]

  • Scarcity is the basic fact of human existence that states that the reason we cannot fulfill our unlimited desires is due to limited resources.
  • Scarcity influences other aspects of economics. If scarcity did not exist, the field of economics would be pointless.
  • Measuring the opportunity cost involves simply knowing what you do not get for the decision you made.

Check your Understanding[edit]







  

1

Which of the following summarizes scarcity?

Scarcity is the relationship between the number of goods made and the price at which goods are sold.
Scarcity is the basic fact of human existence: we cannot have the resources we want without sacrificing another resource.
Scarcity is the basic fact of human existence: we cannot remain satisfied by the limited resources we have because of our unlimited desire for more.
Scarcity is the relationship between the price change of a good and the quantity demanded.

2

Sarah, a friend of yours, works 40 hours per week pulling weeds and mowing lawns around people's houses for $20 per hour. Sarah decides to spend her four hours watching a television marathon. What was Sarah's opportunity cost of her choice?

$

(make your answer into a whole number) is her opportunity cost.