The basic economic problem and scarcity
Economics starts from one simple observation.
People want more than the world can provide.
There are only so many workers, so much land, so many machines and so much time.
But the list of things people would like to have never ends.
This clash is called the basic economic problem.
Resources are finite: there is a fixed amount of them at any moment.
Wants are infinite: when one want is met, another takes its place.
A family that buys its first car soon wants a bigger one, a holiday, a better phone and a new kitchen.
Needs and wants
A need is something a person must have to survive, such as food, water, shelter and basic clothing.
A want is anything a person would like to have, including all needs and every extra on top of them.
Economists usually talk about "wants" to cover both.
The point is that the total of wants keeps growing, even in the richest countries.
Scarcity
Because resources cannot meet every want, they are scarce.
Scarcity does not mean that something is rare.
It means there is not enough of it to give everyone everything they would like.
Rice is grown in huge quantities, but it is still scarce, because the land, water and labour used to grow it could have produced other things, and because people would consume more if it were free.
Scarcity forces choice.
If you cannot have everything, you must decide what to have and what to go without.
Every choice means giving something up, and the best thing given up is the opportunity cost of the choice (section 1.3 explains this in full).
The diagram shows the chain.
Every person, firm and government in the world faces this chain, from the poorest household to the richest country.
A rich country has more resources, but its people's wants are also larger, so it still has to choose.
That is why economics is often described as the study of how scarce resources are allocated between competing uses.
Why the problem never goes away
Economic growth gives an economy more resources and lets it produce more.
But growth does not solve the basic economic problem.
New products appear, incomes rise and people's expectations rise with them.
Fifty years ago no one wanted a smartphone or a streaming service, because they did not exist.
Wants move ahead of resources.
- Basic economic problem: the problem that finite resources are not enough to satisfy people's infinite wants, so choices must be made.
- Scarcity: a situation where there are too few resources to meet all wants.
- Finite resources: resources that exist in limited amounts at any one time.
- Infinite wants: wants that have no limit, because new ones appear as old ones are met.
- Need: something a person must have to survive, such as food, water and shelter.
A family earns $3,000 a month. Its members would like a new car, private tuition for the children, a holiday abroad and a larger flat. Together these would cost $5,500 a month.
Explain how this family faces the basic economic problem.
1. Identify the limited resource: the family's income is fixed at $3,000 a month (its time is limited too).
2. Identify the unlimited wants: the list of things it would like costs $5,500 a month, and would grow again if those were met.
3. Link them: income cannot cover every want, so the family's income is scarce.
4. State the consequence: the family must choose which wants to satisfy and which to give up.
Answer: the family's wants are greater than its finite income, so its income is scarce and it must choose between the car, the tuition, the holiday and the flat.
A student says: "Water is not scarce in my country because it rains every week."
Explain whether the student is right.
1. Define scarcity: there are too few resources to meet all wants.
2. Apply it: clean tap water needs pipes, treatment plants, energy and workers, all of which are limited and could be used for other things.
3. Consider wants: people want water for drinking, washing, farms and factories, and would use more if it were free.
Answer: the student is wrong.
Rain is plentiful, but clean water delivered to homes uses scarce resources, so it is scarce even in a wet country.
When asked to define the basic economic problem, give both halves: limited (finite) resources and unlimited (infinite) wants.
Then, if the question allows, add the consequence: choices have to be made.
An answer that mentions only one half is incomplete.
- Saying that scarcity means a product is rare or hard to find. Scarcity means there are not enough resources to meet all wants, so even common products are scarce.
- Thinking that only poor people or poor countries face the basic economic problem. Everyone faces it, because wants always exceed resources.
- Mixing up needs and wants. Needs are what we must have to survive; wants include needs and everything else we would like.
- Believing that economic growth ends scarcity. Growth adds resources, but wants keep growing too.
Check your understanding
1. Define scarcity. [Recall] [1]
2. State the difference between finite resources and infinite wants. [Recall] [2]
3. Explain why a very rich country still faces the basic economic problem. [Analyse] [3]
4. A small island has one doctor, who can see 30 patients a day. On an average day, 45 people ask to see her. Explain, using the information, how the island faces the basic economic problem. [Apply] [3]
Answers
1. There are too few resources to satisfy all wants. [1]
2. Finite resources are limited in amount at any one time [1]; infinite wants have no limit, because new wants appear as old ones are satisfied [1].
3. A rich country has more resources than a poor one, but they are still limited [1]. Its people's wants are also unlimited and grow as incomes rise [1]. So it cannot meet every want and must still choose how to use its resources [1].
4. The limited resource is the doctor's time: she can see only 30 patients a day [1]. The wants are greater: 45 people ask to be seen, 15 more than she can treat [1]. So the island must choose who is seen each day, for example the most urgent cases first, and the others wait [1].