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Asic economic problem of scarcity and opportunity cost

Explain the link between the basic economic problem of scarcity and opportunity cost. [8] – Winter 2002 Scarcity is the excess of human wants over what can actually be produced. There are not enough of resources to satisfy everybody’s wants. The problem arises due to the fact that as human we have unlimited wants, yet the resources – labour, land, capital and entrepreneur – are finite. The cost expressed in terms of the next best alternative foregone. One choice will be the ‘best’ one and a rational economic agent will take that alternative.

But all the other choices will then have to be given up. Neither people’s wants nor their ability to produce goods and services are constant. Their productive potential is increasing all the time, but so their appetite for material things. As a result, scarcity will always exist. Given that human wants exceed what can actually be produced, potential demands will exceed potential supplies. For that reason, scarcity forces economic decision makers (individuals, families, firms, and governments) to make choices based on rationality.

Making a choice normally involves a trade-off – this means that choosing more of one thing can only be achieved by giving up something else in exchange. It confirms the adage: “there ain’t no such thing as a free lunch. ” In other words, scarcity involves choice which means the sacrifice of the next best alternative where opportunity cost comes in. For instance, more we spend on national defence to protect our shores from foreign aggressors (guns), the less we can on consumer goods to raise our standard of living at home (butter) due to limited amount of money that government can spend.

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Therefore, the opportunity cost of having more guns is having less butter. Laws that require firms to reduce pollution raise the cost of production. Because of the higher costs, these firms end up earning smaller profits, paying lower wages, charging higher prices, or some combination of these three. Thus, while pollution regulations give us benefit of a cleaner environment and the improved health that comes with it, the opportunity cost is the reduction in the incomes of the firms’ owners, consumers and workers. Because most resources are finite, we cannot produce an unlimited number of different goods and services.

Without any doubt, by supplying more for an ever-growing and richer population we are in danger of destroying the natural resources of the planet. Our ecological footprint affects the sustainability of economies and has huge implications for future living standards. At the heart of improving sustainability of resources is the idea of de-coupling – a process of trying to increase the efficiencies with which resources are used and breaking the link between increasing demand and resource depletion. Thus, better choices have to be made.

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