Scarcity means that choosing one use of a resource involves giving up another.
Must know
- Resources are limited relative to wants.
- Opportunity cost is the next best alternative forgone.
- Renewability does not eliminate scarcity.
Must know definitions
Scarcity: the basic economic problem of infinite wants but finite resources.
Opportunity cost: the next best alternative foregone when a choice is made.
Renewable resources: resources that can be replenished, e.g. solar, wind.
Non-renewable resources: resources that cannot be replenished on a human timescale, for example oil and coal.
Free good: a good in unlimited supply, with no opportunity cost.
Economic good: a scarce good that has an opportunity cost.
Explain and apply
Mechanism in brief: Allocating a scarce resource to one use removes it from another. Identify the best feasible alternative and the benefit sacrificed; do not add together every rejected option.
Distinguish: Free goods and goods supplied free of charge are different; renewable does not mean unlimited.
Use the extract: Identify the scarce resource and the best alternative sacrificed, rather than listing every possible use.
The problem of unlimited wants and finite resources
Scarcity is the basic economic problem: human wants are infinite, but the resources available to satisfy them are finite.
- Because resources are scarce, decisions must be made about what, how, and for whom to produce.
- Economics acts as a tool for choosing between competing demands on limited resources.
scarcity (finite resources + infinite wants) → choices must be made → opportunity cost
The distinction between renewable and non-renewable resources
Renewable resources can be replenished over time (e.g. solar, wind); non-renewable resources cannot be replenished once used (e.g. oil, coal).
- Energy generation is a useful market for illustrating this, since it relies on both types.
| Renewable resources | Non-renewable resources | |
|---|---|---|
| Replenishable? | Yes | No |
| Examples | Solar, wind, hydro | Oil, coal, natural gas |
The link between scarcity and opportunity cost
Opportunity cost is the next best alternative foregone when a choice is made.
- Because resources are scarce, choices must be made, and every choice carries an opportunity cost.
Consumers
new textbook vs meal out; producers: dividends vs capital investment; governments: education vs NHS equipment.
opportunity cost is the next best alternative foregone — not all alternatives foregone, and not the money spent.
The distinction between free goods and economic goods
A free good is in unlimited supply, so using it carries no opportunity cost; an economic good is scarce, so obtaining it means giving up an alternative.
- Most goods studied in economics are economic goods.
- True free goods (e.g. air) are rare.
| Free good | Economic good | |
|---|---|---|
| Supply | Unlimited | Scarce |
| Opportunity cost? | None | Yes |
| Example | Air (normal conditions) | Food, clothing, machinery |
The relevant cost depends on what would otherwise happen. An idle resource can have a lower opportunity cost than a fully employed one, but any valuable alternative use still counts.
Rapid recap
Scarcity means resources cannot satisfy all wants. Opportunity cost is the next best alternative forgone, expressed in the relevant alternative's units.
Diagram cue: use a PPF if it clarifies the sacrificed alternative.
Related chapters: Unit 1 chapter 4 (p. 10) · Unit 1 chapter 6 (p. 18)