Answer to Question #7930 in Economics of Enterprise for harjinder

Question

Explain the economic problem of scarsity and describe the consequent types of economics chices yhat need to be made in an economy.write about 100 words.

Answer 1

Scarcity is a basic concept in economics. It applies to both individuals and the economy as a whole.


At the personal level, scarcity is the corollary of human finiteness. There are limits on what a person can do, even in an entire lifetime. There are only so many hours in a day, and days in a week. If I want to spend more time sleeping, I will have to give up some of my leisure activities. If I want more time for leisure, I will have less time for paid work or work around the home. If I want to spend more time doing art, I may need to spend less time growing food.


Time is limited, so people must make choices about how they spend their time. If I choose to spend more time on one activity, I will to spend less time on some other activity. Life is full of choices about how we will spend our time.


Humans are not omnipotent. One person will not have the strength and energy to build a new house and run a marathon in the same week. Our finiteness places limits on what any person can produce. Everyone must make choices about what they will make and do. The economic term for this is “scarcity”.


Similar limits apply to an economy as a whole. The labor, capital, technology and other resources available in an economy are limited. Air, energy from the sun, and sometimes, water are the only resources that are available in unlimited amounts. The earth contains huge of volumes useful minerals and metals, but much of it is not easily accessible. Labor and capital are needed to extract it.


Human technology is limited. We do not have the technology do everything that we want. We might prefer to use energy from the sun to power our motor vehicles, but we do not have the technology yet and if we put further efforts into developing it, we will have to put less effort into other technologies that might be more useful.


Capital is also limited. Capital can only be obtained by forgoing consumption or leisure, so an increasing use of capital to be more productive, can only be achieved by increased saving. Every economy faces a choice between saving to make the economy more productive and consumption to increase well-being.


In the short-term, every economy has a limited population and therefore a limited labor force. Furthermore, there will be limited supplies of some of the skills that are needed to produce certain types of things. The reason is that when people decide to obtain a certain type of training, they choose not to develop other skills. People can only develop into one or two professions and they can only develop a limited range of skills.


In every economy, limited resources (labor, capital, technology and natural resources) place a limit on what can be produced. The technical name used by economists to describe this state of affairs is scarcity. It is not a perfect word for this purpose. “Finite” might be a better word, but we are stuck with the common practice.


Choices


Scarcity requires choice. Whenever, we want more of something, we have to choose to have less of something else. If I decide I want to earn more money, then I am choosing to have less leisure. Since I am finite, I cannot choose to do more work and have more leisure at the same time.
This verse must be really important, because it is repeated word-for word in Proverbs 24:33-34. Scarcity is used here in a different sense, as a synonym for poverty, but the verse is a clear statement that we face a choice between leisure and poverty. Likewise, if I want to spend more time preaching the gospel, I will have to spend less time at work or relaxing.


Most of our choices we face involve a cost. The cost is whatever we have to give up, when we choose to do something else. If I choose to buy a television, then I will have to postpone buying a new laptop. That is the cost of my choice. Even giving has a cost. If I give money to the poor, I cannot use it to buy groceries.


In a money economy, choice at a personal level takes four forms.


I have to make the choice between work and leisure. This choice determines my income. The cost of my income is the energy I expend at work and the loss of leisure time.


I have to allocate my income between consumption and saving. The cost of increased consumption is a reduction in savings, which may close out some future options.


I have to decide how much of my income, I will give away to others. The cost of giving is the consumption that I will have to forgo.


I have to allocate my expenditure on consumption between a multitude of goods and services that are available for purchase.


We are constantly making and revisiting these types of choice. Economic is really a study of how people make choices. The economist attempts to understand how people weigh up the cost of the choices they must make and how they allocate their time and energy between the infinite number of choices that everyone faces.