Scarcity, choice and opportunity cost

Meaning of Economics

One of the most quoted definitions of Economics today is perhaps, “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”. This Definition was given by Lionell Robbins in 1935.

If we put in simple words, Economics is the study of human bahaviour in relation to their wants. It studies how human beings manage their scare resources in trying to satisfy their wants.

Scarcity

Scarcity means limitation of the availability of resources in relation to their wants. That means the available resources are not enough to completely satisfy all the wants.

By now, you must have already learnt that human beings have unlimited wants. And as the resources with which these wants must be satisfied are limited, we can understand that ‘scarcity’ is the central economic problem of everyone including individuals, firms and the government, and even the whole world.

Opportunity Cost

If we decide and choose which want to satisfy with the available resource, then there are other wants we have to leave unsatisfied. We have to forgo something in order to satisfy a want. The want that is forgone is called the ‘opportunity cost’. It is also known as ‘the next best alternative’.

The concept of scarcity, choice and opportunity cost can be shown in many ways, at different levels. For an individual, it may involve choosing the best from the choices available. For example, a student may have to choose between doing A levels and going for a diploma right after finishing O levels. Choosing one option means the other option has to be forgone.

A firm may have to choose between different production methods.

A government may have to choose between different development projects.

Inevitability of choices

Each and every level of economic agent (individuals, firms or government) has to make the choices as all of them are confronted with central economic problem (scarcity). Governments have to decide on the best possible way to allocate resources (example – where and what kind of factories must be built), the firms have to decide how to maximize profit (what is the most efficient way to produce goods) and individuals have to decide how to maximize their welfare (which goods will give them most satisfaction). In the process of making this choice they have to give up other alternative so the concept of opportunity cost is applicable for each and every level of economic agents.

The basic economic questions

There are some basic questions faced by every society. How they are answered depends largely on the type of economic system the country has. The questions are:

  1. What to produce?
  2. What to produce primarily depends on consumers in free market. The consumers choose the product they like and thus their choices direct the types of production that should be carried out. The firms will follow this because this is the most profit maximizing combination.
    Sometimes the government too can decide what to produce. The government may decide to produce an essential good or service which everyone ought to have.

  3. How to produce?
  4. This question will be answered by those supplying the goods and services. If the supplier is a private firm, it will seek to use the method which will give the maximum profit. For example, production can be done using labour intensive method and capital intensive method. The private firm will decide on the method which will give lowest average costs.
    If the government is the supplier, it may try to use the method which promotes welfare of the society rather than maximising the profit.

  5. For whom to produce?
  6. For whom to produce will also depend on the suppliers (government and private firms). The consumers are the target of production, but the kind of consumers the firm or the government wants to target is the question. The government usually produces for the general public where as the private firms can seek to maximize profit by producing for the high and rich level customers as well as the general public. In simple words, the production is done for those who are willing to pay.

    Note: among the suppliers, there will also be private individuals(sole traders). Their objective in production is the same as that of the private firms – that is, to maximise profit.

    short run, long run, very long run

    In the perspective of an individual firm, the short-run is when at least one of its factors of production is fixed. Therefore, there will be a limit to the extent to which it will be able to respond to an increase in price.

    However, firms will try and increase their capacity by increasing all their factors of production, which means all the factors of production can become variable. This is known as the long-run. Therefore, the long run is the time which is taken by a firm to change all of its factors of production.

    In the very long run, not only all of a firm’s factors of production are variable, but also all the inputs which are beyond the control of the firm. During the very long run, not only are the labor, capital, land, and entrepreneurship inputs variable, but so too are key production inputs such as government rules, technology, and social customs.

    Next Topic: Different allocative mechanisms

2 thoughts on “Scarcity, choice and opportunity cost

  1. These notes are good. However I must say that some people are content with what they already have. Unlimited wants are of those who are materialistic.

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