Concept of Scarcity Central to the Study of Economics - Essay Example

Concept of scarcity central to the study of economics Name Course Instructor’s Name 9 April 2010 Scarcity of resources is one of the central terms in economics. It is actually considered by some economic gurus as the main essence as to why economics is studied (Spencer, 2004). This is so because if there was no scarcity then study of economics would not be essential, as management of resources would then not be necessary (Anand, 2007). It refers to the fact that in this exceedingly competitive world the amount of resources available is not sufficient to fulfill all the wants that one may have or that the society may have (Maki, 2004). As a result, one has to choose what needs to meet and what needs to overlook or to do without. The act of choosing one thing and foregoing the other costs one a price and this is referred to as the opportunity cost (Webster, 2003). Scarcity is only evident when we refer to economic goods and not free goods. Free goods are such goods as sea and river water as well as air, which are available to all at no cost. In the allocation of resources, a lot of care as well as economic skills have to be taken so as to avoid inefficiencies that would otherwise occur. This paper focuses on the aspect of scarcity in relation to the opportunity cost. It incorporates economic theories and focuses both on individuals as well as on the society as a whole (Webster, 2003). Many economic theorists like David Ricardo and Adam Smith studied this topic and came up with theories to expound this topic. For an individual or a group of people to come to a conclusion of what to take and what to forego, they have to go through a decision making process and this is where consumer psychology is important (Hodgson, 2001). The act of how an individual results to one choice and foregoes the other is called consumer behavior. The study of consumer behavior or the study of what one ought to forego prediction is done in consumer psychology (Anand, 2007). How society allocates the resources is a central area of interest as well as how individuals do it as well as governments (Maki, 2004). Individuals are faced with the activity of always choosing what option to settle for as far as satisfying their needs are concerned. This is so because their needs are insatiable by the resources that are available to them they thus have to decide to which they need to allocate their resources and which need to forego (Hodgson, 2001). That which they forego is the opportunity cost. A good example would be when individual A has two options. Individual A has just cleared pursuing their undergraduate studies and is now faced with the choice of whether to pursue their masters’ degree or first to get a job, which is now available to him (Combs & Ketchen 1997). Both options are good for if he takes the job he will be earning some money and will be able to cater for mall his needs. On the other hand if he takes the option of the masters degree he will be able to gain more knowledge and in future he will be eligible for even better paying jobs. In this case, if he chooses pursue his career further and take the masters degree then the job will be his opportunity cost. He will have foregone the benefit from the salary, which he would be earning at the expense of his choice (Maki, 2004). This in turn raises the idea of risk which is an important term in the study of economics and more so the topic of scarcity. Risk arises from the fact that he is not sure that he will get that better job if he lets the now available job to pass him. As a result, by letting this job pass him he is risking because the future job is actually just a speculation. At the cost of gaining it, he could loose all (Webster, 2003). This was disclosed by David Ricardo in his theory of trade when he said that the opportunity cost of that which you choose in this case studies is that which you forego in this case the job. He gave the formula of calculating the opportunity cost of one option as the marginal cost of one option over the marginal cost of the other. Ricardo also discussed the idea of trading off one product for the other (Maki, 2004). This means that one takes a certain proportion of one product and a certain proportion of the other. This is different from completely giving up one product and settling for the other as earlier discussed (Webster, 2003). However in both cases the constraint is the resources available which are scarce. However when he discussed he based it on production other than on consumption. This means that if one is producing cake and biscuits with only a limited amount of wheat floor then the opportunity cost of biscuits are the number of cakes a producer will no longer produce if he chooses a certain number of biscuits (Hodgson, 2001). The concept of scarcity also brings up the concept of priorities as well as of budgeting. This is also in the theory of trade. A consumer puts his needs against his resources and he seeks to satisfy the most pressing needs first (Hodgson, 2001). In a budget, the urgent needs are prioritized first and the rest are way down in the budget to be satisfied later. Thus, scarcity is the mother of all these economic terms (Maki, 2004). The same applies when one is studying to national issues or the societal issues. Whenever a government budget is being prepared the needs and wants always supersede the available funds or resources and this in turn puts the government officials who are concerned with allocating funds in a position of making choices and foregoing what is not termed as important (Webster, 2003). This brings in the idea of another important idea of setting the priorities right. They budget in such a way that the most pressing needs or the urgent needs are at the top of the budget. These needs are such issues that are deemed more important than others (Hall & Lieberman, 2000). These include such issues as the issues of national security and they have to be at the top of the budget as well as matters of utmost importance like national health and provision of the basic supplies. The rest of the issues come after the needs that are so pressing are first allocated the national resources. After that, they now allocate resources to the lesser pressing needs (Hodgson, 2001). An example is when the inhabitants of a nation are threatened by a deadly virus and a cure is found that can cure this disease but unfortunately, it happens to be so expensive in such a way that the average national cannot afford it. However, an immediate defensive system is required for the nationals not to get the deadly virus (Anand, 2007). At the same time, there is need for the government to release funds for the construction of new infrastructure to cope with the current demand. This infrastructure is deemed important because its construction will better the trade terms for the government and more national income will be generated from it (Webster, 2003). Due to the national interest and the urgency of the vaccine, the gorvenment chooses to first release the funds for the vaccine. The opportunity cost for funding the vaccination of the nationals is the benefit that would have been got from the construction of the infrastructure. The gorvenment foregoes that benefit so as to satisfy a more pressing need (Hodgson, 2001). This is also true for a production firm. David Ricardo observed in his theory of trade that traders will produce so long as the marginal cost of producing remains fair on the economic scale (Maki, 2004). This means that scarcity also affects the amount that traders can produce for they are limited by the cost of production. Scarcity necessitates choice and this choice always results to the opportunity cost (Hall & Lieberman, 2000). Whenever a decision is made in the society, scarcity always leads to three major questions. What to produce, how best it can be produced and who it is produced for (Hodgson, 2001). Scarcity actually is what determines the market value of a product. This is so because the supply of a product in comparison to its demand determines the price at which it will be sold (Webster, 2003). When a product is scarcer then its market value is higher and when the products supply is higher then market value goes back to normal (Anand, 2007). In conclusion, scarcity is very important in economics. It necessitates the study of economics. From it raises the concepts of demand and supply which in turn determines the price level. Budgets also arise due to scarcity and so do other economic plans. It is evident that scarcity is one of the founding issues of economics. That is why economists like David Ricardo in his theory paid enough interest to scarcity and to topics that were closely related. Scarcity, choice and opportunity cost cannot be separated as one leads to the other as the paper clearly revealed. References Anand, P. 2007. Scarcity, entitlements and the economics of water in developing countries. London: Edward Elgar Publishing. Arnold, R. 2008. Economics, 9th Ed. London: Cengage Learning. Combs, J. & Ketchen, D. 1997. The effects of resources scarcities and agency costs on choice of organizational form in the US Restaurant Industry. Journal of Hospitality & Tourism Research, 21, pp. 27-43. Hall, R. & Lieberman, M. 2000. Macroeconomics: Principles and Applications, 2nd Ed. New York: South-Western College Publications. Hodgson, G. 2001. How economics forgot history: the problem of historical specificity in social science, 2nd Ed. London: Routledge Publishers. Maki, U. 2004. Theoretical isolation and explanatory progress: transaction cost economics and the dynamics of dispute. Cambridge Journal for Economics, 28, pp. 319-346. Spencer, D. 2004. From pain cost to opportunity cost: the eclipse of the quality of work as a factor in economic theory. History of Political Economy, 36, pp. 387-400. Webster, T. 2003. Managerial economics: theory and practice. New York: Emerald Group Publishing. Read More