The Concept of Scarcity in the Study of Economics - Essay Example

The Concept of Scarcity in the Study of Economics Introduction Scarcity implies that human beings always want more than what nature is able to provide. In other words, the resources that nature provides are not enough to satisfy all human wants. Scarcity affects us both as individuals and as economies. As individuals, scarcity of such resources as finance, time and skills limits our ability to do and have what we want all the times. For an economy like our country, scarcity of such resources as manpower, machinery and mineral resources fixes a maximum on quantities of goods and services that the economy can produce. Scarcity of resources calls for individuals to make choices on what wants are to be satisfied and the ones to be left unsatisfied. When we as individuals or economies opt for more of something, scarcity compels us to take less of another commodity. This implies that economic activities would be non existent if there was no scarcity and hence no choice. When scarcity and choice occurs, costs arise (Iannaccone 2008, p.1464) . The cost of a particular choice is the option forgone by opting to satisfy the want. For example, the cost for a student who chooses to be in class would be the enjoyment that would have been received if the student went for a tour instead. People make choices by comparing the benefits of alternative choices. The option with the maximum benefit is chosen. Therefore, the cost of choosing option A would be the sacrifice undergone in rejecting option B. The opportunity cost can also be said to be the sacrifice involved in rejecting the next best alternative. This paper attempts to analyze how scarcity affects both individuals as well as the economy en bloc specifically as it relates to opportunity cost. Every day, individuals are faced with tough choices on how to allocate their scarce resources. This is because the choices have their associated costs and benefits. Therefore, the individual has to weigh the benefits of choosing any given choice. A rational individual will always choose the alternative that has the greatest benefit. However, each choice made has its associated opportunity cost. Examples of choices that people make due to scarcity are on how to spend their time, money, where to live etc. Rational persons consider all the costs of making their choices. A good example is the choice made by students to go to school. In this choice, there are direct costs involved. Direct costs include the amount of school fees paid by the students and all out of pocket payments made by the students to acquire various goods and services related to their schooling. On the other hand indirect costs paid by the students are the opportunity costs and include the things that the students would forego by deciding to attend school. If the students had made the choice not to attend school, they would have preferred to invest the money in an investment that would have yielded interest. The student could also have been employed and hence earn wages. Therefore for the student’s opportunity costs would include lost wages interest, lost rent and profit. It should be noted that for the students, the benefits of staying at school were more compared to those of abstaining from school. Economies are also faced with scarcity of natural resources. Therefore, have to make choices on the application of the scarce resources (Sihag 2005, p. 724). The economy must decide what the goods they want to produce are. They must decide whether they want to be service based or product based economies. The economies also need to identify the resources that they will require in production. They must also decide on the technology applicable in the production process. In this regard, the economies should focus on producing goods with the lowest cost. Once the goods are produced, the economies need to decide who will receive them. The final question that the economies need to answer is the time that production will occur. All this choices are based on scarcity of resources. Choosing one alternative implies an opportunity cost for omitting the next best alternative. A good example is the budgetary allocation by various economies in an attempt to allocate the limited resources. Generally, natural resources occur in limited quantities (Sen 2009, p.35). The distribution of these resources also varies form one economy to the other. An economy may have an excess of one resource while still lacking in the other. Other economies may have natural resources but lack technical knowhow on how to extract these resources. For example, many African economies have mineral resources but lack technological skills for extracting these minerals. The cost of extracting these minerals is also very high due to high costs of energy. Because of scarcity of technical skills, the African countries have to contend with the issue of whether to export the minerals in their low form or invite multinationals from the western world to do the extraction. Adopting either of the options involves some opportunity cost. As stated earlier, opportunity cost is the value of the next best forgone alternative when one makes a choice. In this case, the African economies have to forego the benefits that would arise if they were to extract these minerals by themselves. This would obviously result in more foreign exchange although it would call for more investment in technology. Scarcity of technology has also great affected the agricultural sector in the continent. Despite the fact that there are vast land resources in Africa, most of it lie idle. The sub-Saharan Africa has to rely on food donations from other countries due to lack of adequate technology to utilize the vast land resources. To deal with this problem, the economy need to invest much into agricultural technology and come up with ways of managing water resources. This is the opportunity they would have to pay for choosing not to rely on food hand outs. Water is life. As such it affects not only individuals but also economies. A country with limited water resources is likely to experience retarded economic growth. This is because water is an important component of production for all sectors of the economy (Friedman 2003, p.58). For Australia, water is very essential for its agricultural sector.the mining sector in Australia also use water in all stages of mining. Water is also an essential input of Australian economy. The pie chart below shows how various sectors of Australian economy use water. The chart shows how important water is to Australia. However, despite the importance depicted by the chart, Australia always has bad climatic conditions .in fact, Australia has the least average rainfall compared to all other continents. Despite the fact that agriculture uses most of the water, the sector has the least gross value added per liter of water. This means that the allocation criterion is not efficient. Australia therefore has to make a choice of changing the allocation criteria to the most effective one. This would mean for example reducing the amount allocated to the agricultural sector or the amount that is allocated to urban areas. Adopting any of the alternatives would also result to the opportunity cost. For example, moving water form agricultural sector to the mining sector would mean reduced agricultural output but increased industrial output on the other hand. In making these choices, the government would have to evaluate the benefits of each alternative and hence choose the best one. This is an example of how scarcity forces an economy to make a choice from among alternatives and eventually incur opportunity cost. Another resource that is in limited supply is land. The scarcity of land is associated with the increase in population. This is because population increase increases demand for food. Space is also required for building. In America, land is a limited resource despite the fact that it is a vital component of production. Individuals and economies therefore have to make choices to deal with the scarcity of land bearing in mind that its supply is fixed (Blaug, 2007, p. 34). The American government has intensified the campaign against having a large family size in a bid to deal with this problem. An additional way of dealing with this predicament is by improving in technology. This will in turn have the effect of increasing output. No mater the choice that will be taken, it will come with its costs which the economy must be prepared to bear. Labor is a very important component of production. Production can not take place without labor. Despite the fact that china has very high population, it has scarce skilled labor supply (Sigmund 2002, p. 85). This kind of labor is required to drive the most important sectors of the economy. In a bid to solve this need, china can either import labor at cost or train their own at cost. The best alternative will depend on their cost benefit analysis though. The above examples explain how economies make various choices because of scarcity in resources. Conclusion Due to scarcity of various resources both organizations and individuals are compelled to make choices. All the choices made involve costs. Therefore, economies and individuals ought to make choices that will maximize the returns. References Blaug, M, 2007, “Economic Theory in Retrospect”, Canadian economic journal, vol.45, no.69, pp. 26-39. Friedman, M, 2003, "The Methodology of Positive Economics," American economic journal, vol21, no.23, pp56-58. Iannaccone, L.R 2008, "Introduction to the Economics of Religion," Journal of Economic Literature, vol.36, no. 15, pp. 1465–1495. Sen, A 2009, “The Welfare Basis of Real Income Comparisons: A Survey," Journal of Economic Literature, vol.17, no.1, pp. 1–45. Sigmund, K, 2002,"The Economics of Fair Play," Scientific American, vol.286 no.1, pp. 82–87. Sihag, BS, 2005, “Kautilya on public goods and taxation”, History of Political Economy, vol.37 no.4, pp. 723–753. Read More