Scarcity, Choice and Opportunity Costs - Term Paper Example

Scarcity, Choice and Opportunity Costs Scarcity is a problem which almost all countries around the world face. It revolves around the frame of humans having an unlimited desire for objects and their needs are never ending while the resources themselves restrict them by being limited. When a society is incapable of pursuing more than one goal at a time it refers to having a scarcity problem. When referring to a scarce good, the good is known as an economic good. These goods need to be utilized to their maximum extent so that they may not go to waste. Societies allocate these resources but often fail to achieve their optimal output. Moreover, the individuals residing in these countries have to deal with factors such as inflation to counter them. Scarcity is defined as that realistic condition in which the resources are limited and that in return prevents human wants from being satisfied to the extent which is desired. [Ext11]. This is the point where the economic problems formulate and the people in need of these resources are required to make choices between them. Scarcity of resources builds on their values and this in return favors those in demand of the resources. In other words, scarcity is what drives the economy. [Ext11]. Economic scarcity is subjected to the demand of resources and how limited those resources actually are. These functioning together are what formulate the “Principle of Scarcity”. This law states that if the desire for a limited resource is in excess than the value of the resource increases accordingly. [Ext111]. Scarcity is a realistic condition which prevents the wants of humans to be fully satisfied. It is where economic problems originate and what leads to humans having to make choices between things. [Sim111]. The section of how to manage scarcity is a primary concern for economists. The process to do so involves an exchange of resources which in return brings out the maximum amount of satisfaction that a society can obtain with given resources. A system of trade needs to be introduced for this to function. [Sim111]. The concept of free market shows a frictionless economy in which there is a balanced between demands and wants to tackle the problem of scarcity. [Arc11]. The existence of economic factors always is at place to bring about the scarcity of resources. This in return requires the population to always be ready to adapt to the change in the economic conditions. In USA for example, people on average continue working in a specific job for 3 years. A person working on an economic good for too long leads to negative scarcity this in return leads that person towards unemployment. While in a flexible economy continent, unemployment is a fear which makes people work at all prices even if the production leads towards negative scarcity. Economic choice is deciding between the different uses of scare resources. [tut11]. Because of the scarcity of resources, people must make choices between them so some extent of their desires may be fulfilled. When making a choice the individual is required to make a trade-off. The trade-off is known as the opportunity cost. This is an unavoidable issue because the resources are limited. An assumption has to be made that the consumers must make choices about what to consume based on the objective to maximize their own welfare. [tut111]. Different economic systems handle this process in different ways. But the essential focus is to ensure that the problem is solved. In a traditional economy, the method used to allocate resources is done on the basis of custom and traditions. Free market economies are where households own resources and they themselves are responsible for the workings of the price mechanism. [tut111]. The limited role that the government has restricts it from protecting property rights of people and businesses operating under the legal system. Under the planned economy the scarce resources are owned by the government and the allocation is done under the rules and regulations that the government wants. The final income and wealth distribution is a final decision made by the state. [tut111]. The mixed economy has both state and private owned resources. The opportunity cost measures the cost of any choice made by the next best alternative that has been foregone in this decision. The cost or the good that has been foregone has always been thought of in the terms of monetary terms. [Net11]. Opportunity cost is useful when it comes down to the evaluation of costs and the benefits of the choices. Resources that are small in quantity than the demand for them are the ones that opportunity cost applies to. These are scarce resources and only scare resources are the ones that opportunity cost can apply to. Scarcity is what gives into the rise of making a choice. If these resources had only single purposes then the need for making a choice would not exist. For example, petroleum is used as the energy source to make cars move, while at the same time petroleum is used to clean mechanical parts. Because of problems that revolve around scarcity, choices need to be made. Economists use this term of opportunity cost when referring to that choice that has been made. The name itself does not imply what it means as there is no costs that are associated with it; it just simply represents the opportunity that has been given up. If a consumer can buy two goods but chooses to buy one then the concept of opportunity cost does not apply to the scenario. [Chr11]. This simple concept plays a powerful role in the implications that relate to it. When making a choice the cost-benefit principle applies to it in which the action of purchasing a product should be made on the basis of whether the value is fulfilled by the price that is being paid for it. Some economists do not know the exact definition of opportunity cost so sometimes the confusion of understanding what the actual opportunity cost is may occur on and off. Understanding how to distribute costs and benefits should be the goal of economists and individuals who have to make a choice. The choices of goods and services that have to be made are how choices are made. Even when a person does not pay for consuming a good, scarce resources are used in the production of it and some kind of opportunity cost has been involved in the process. The opportunity cost basically measures the cost of any economic choice that has been made for the next best alternative. [tut112]. There is also confusion among some economists when the topic of opportunity comes around. Opportunity cost does not measure all alternatives that could have been taken. Only and only the ones those are the second best one. The use of the production possibility curve is what helps a country allocate the resources according to the opportunity costs. The production possibility curve shows how the gain of one good while decreasing it of the other good. According to the curve graph, the opportunity cost of a good is vertical axis = 1/absolute slope. While the opportunity cost of a good on the horizontal axis = absolute slope of the production possibility curve. Therefore, when there is a straight line on the production possibility curve, the opportunity cost is constant. [Pro11]. The basic economic problem comes down to the scarcity of resources that leads to consumers having to make a choice and the choice that has been foregone is the opportunity cost. These three concepts are all interlinked with each other and relate to each other at every step of economics. Opportunity cost is that disadvantage that comes from having to make a choice. In the same way when understanding these concepts, the impact that time has on an economy itself results to becoming a resource. In order for the society to function, the idea of economizing the consumer behavior becomes important. This enables the consumer to obtain maximum utility out of a product whereas free goods are not utilized to their maximum potential. Value addition is what makes a product important and the demand increase is what shows how essential that product actually is in the economy. Gold, having a rising price, is an essential element of an economy as it is the backbone behind the currency that the country has. The gold reserves determine the world currency rates. Therefore, scarcity itself arises from the unlimited desires that humans have and the limitation of the resources available. References Ext11: , (ExtraordinaryAbundance.com, Economic Scarcity in an Abundant World), Ext111: , (ExtraordinaryAbundance.com, Law of Scarcity), Sim111: , (Simon), Arc11: , (Archytas), tut11: , (tutor2u, GCSE Economics - Choice And Opportunity Cost), tut111: , (tutor2u, Microeconomics - Scarcity and Choice in Resource Allocation), Net11: , (NetMBA), Chr11: , (Chrisagbe), tut112: , (tutor2u, Choices and Opportunity Cost), Pro11: , (Production Possibility Frontier), Read More