Scarcity is the basic problem in economics in which society does not have enough resources to produce whatever everyone needs and wants. Basically, it is unlimited wants and needs vs. limited resources. Scarcity is faced by all societies and economic systems. Since we are faced with scarcity, we must make choices about how to allocate and use scarce resources.
Economics is the study of how individuals, firms, and governments deal with scarcity. As a result of facing scarcity, all members of a society have to make choices in an effort to manage our resources in the most efficient way possible. The choices we make are known as trade-offs.
Microeconomics vs. Macroeconomics
Microeconomics is the study of how individuals, households, and firms make decisions and allocate resources. For example, whether a high school graduate chooses to go to college or directly into the workforce is a microeconomic decision.
Macroeconomics is the branch of economics that studies the behavior and performance of the entire economy instead of just its small parts. The discussion on unemployment numbers currently in the news would be a macroeconomics topic.
Factors of Production
The resources that are scarce in every society are divided into four categories:
- Land—natural resources and raw materials used to make products. Ex: water, vegetation, oil, minerals, and animals 🏝️
- Labor—the skills and abilities that individuals devote to a task for which they get paid 👷
- Capital—these types of resources can be divided into two types, physical capital and human capital
- Entrepreneurship—the ability of an individual to coordinate the other categories of resources to invent or produce a good or service. Ex: Bill Gates, Steve Jobs, and Henry Ford 🚗
Opportunity Costs and Trade-offs
Trade-offs—each of the alternative choices that you gave up when making a decision. For example, you walk into the cafeteria for lunch at school and you have the option of pizza, a cheeseburger, or chicken sandwich for lunch. If you choose to have pizza, then the cheeseburger and chicken sandwich are your trade-offs🍕
Opportunity Cost—this is the value of the next best alternative when making a choice. Going back to the example of what to have for lunch, if you choose pizza, but get to the front of the line and the last slice of pizza was taken by the kid in front of you, you choose a cheeseburger instead. The cheeseburger is your opportunity cost because it is the next best alternative if your first choice is unavailable 🍔
The table below shows two possible combinations of trucks and cars that can be produced given a set amount of resources. A company or country can move between the two possibilities to best meet their needs. When they move from combo A to combo B, they give up 6 million trucks. That is their opportunity cost for this decision. If they were producing at combo B and moved to combo A, they would give up 8 million cars (opportunity cost).
|Combo A||Combo B|
|Trucks||8 million||2 million|
|Cars||2 million ||10 million|