The Concept of Scarcity - Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Course : xxxxxxxxxxx Title : The Concept of Scarcity Tutor : xxxxxxxxxxx @2010 Concept of Scarcity Introduction Scarcity is a situation in which there are not enough goods and services to satisfy the existing demand. It occurs when the amount of goods demanded is more than the amount supplied. This phenomenon brings about the element of choice which results in opportunity cost. Opportunity cost is the value of the goods or services that is for gone. The concept of scarcity is a very vital part of economics as a discipline. This is because economics as a discipline revolves around the use of scarce resources in the production and distribution of valuable commodities (Ernest and Bulent, 1996). It is however noted that the form of scarcity on which economics is based on is relative and not absolute scarcity. Absolute scarcity is a situation in which there are not any goods and services to go round. This can be analogized by what happens in drought stricken third world countries in which case there is not any food available. On the other hand relative scarcity states that “goods are scarce because there are not enough resources to produce all goods that people want to consume” (Samuelson and Nordhaus, 1989). It is thought that scarcity exists “simply because it is human nature for people to want more than they have” (Ruffin and Gregory, 1993). Scarcity Since human beings are insatiable the concept of scarcity advocates for the rationing of goods and services in a given way. This is done to ensure that there is some form of balance in the demand and supply of goods and services. The system that is most commonly made use of is the price system. In the price system; a price is put on a good or service which necessitates an individual to choose which goods or service he/she will use his/her respective income on. For instance the subscription to DStv services is far more expensive than the subscription to local channels in Kenya. This makes people who have little money to spend on luxury unable to subscribe for DStv. This has further led to a big divide between the rich and the poor in terms of what kind of goods and services is available to them. However, there are goods which are not scarce for instance air and water. These goods are readily available. Some versions of the goods; that are ‘clean’ air and ‘drinkable’ water are not readily available. People therefore pay for these resources. Scarcity helps us understand that resources are limited and we cannot satisfy all of our wants. It also makes us devise ways to make use of the available resources in the most prudent and economical way. This brings about the concept of choice which implies some form of cost hence the term opportunity cost. Opportunity Cost Opportunity cost is the worth of the alternative that is relinquished. For instance going for dinner instead of the movies or studying for exams versus going for a family’s get together or buying lentils instead of buying meat, taking up a job instead of going to college. From the aforementioned examples it is observed that taking one option means sacrificing the other option. The opportunity cost of dinner is the movies given up; that for studying is the family’s get together given up, that for lentils is meat and that for taking up a job is going to college. All these examples show that the choice of one item over another results in a person for going something that has value which implies some sort of cost (Raiklin, 2000). The concept of scarcity and the idea of opportunity cost being very important in the study of economics have led to its in-depth study and thus the use of graphs in its representation. Below is a diagrammatic representation of the concept of scarcity and the opportunity cost in a Production Possibilities Frontier (PPF). A production possibilities frontier is a graphical representation of the possible combinations of the production of two items given the obtainable resources and technology. Resources are things used in the production or things that facilitate the production of other goods and services. The resources used in this context are; human labor, capital that is machinery and land. Human labor is the man power used during production (Raiklin, 2000). It may either be manual or professional. Manual labor involves routine activities that are done by employees who may not necessarily be professionals. Professional labor is that which is done by trained staff and it involves planning and management. Capital are the tools made use of during production; that is machinery, money used to facilitate production. Land is provided for by nature. On the slope of the graph are the points (A, B, C) which are efficient due to the lack of wastes. Points within the slope are inept (pt. I) and points without the line are unfeasible (pt. U). The points on the line are equal in efficiency, but are dependant on individual preferences. The slope of the line is a representation of the opportunity cost of increasing the ‘X’ good by a single unit. For instance the movement from A to B implies the gain of 50 defense units and the loss of 85 nondefense units. Therefore the movement from A to B is 85 nondefense units which is what we have to for go (Rudolf, 2004). The notable examples of opportunity cost are; the guns versus butter debate which is the mulling over whether to spend a lot of money on defense or on domestic use. Money on defense means the use of money to invest in ammunition, fighting equipment and the training of soldiers for war. Domestic use implies the use of money on goods and services that are used in production of food and the general upkeep of the population. Gender equity in spending on sports; this is determining whether or not to invest on male or female sports, regulation of drugs by FDA; the institution must decide whether to allow the use of certain drugs with the looming risk of harming someone with a dangerous drug or of keeping a drug and harming someone by not availing the drug in the market (Rudolf, 2004). The possibility of causing harm on a person with an approved drug is a Type I error, the other possibility of harming someone by withholding a drug is Type II error. Lastly crime prevention and the debate of how much should be spent on it. The spending of a lot of money on crime (which means the purchase of equipment used to fight crime, the investment in the court systems and the investment in a greater number of police officers) means the going without certain goods and services and vice versa. The other principles which come into play with scarcity are the principle of increasing costs. From the graph above, it is noted that the slope curves outwards. From the curve, it is implied that as the production of a good increases so does the opportunity cost of producing another unit. This is due to the loss of productivity in some goods when they are transferred from what they do well to what they do poorly due to the specialization of resources. It can be deduced from the curve that the opportunity cost of the production of more defense goods increases (Ernest & Bulent, 1996). However, in the event of using unspecialized resources, the principle does not come into play and thus the production possibilities frontier yields a straight line. For instance in the production of right shoes versus left shoes yields a straight line. This is because the resources required for the production of the aforementioned shoes are identical. The Economy Economy is the state of a country’s financial base and the overall trading climate. It is mostly measured by the use of Gross Domestic Profit, GDP. However, economic growth implies an increase in the economy’s level of production. Economic growth can manifest itself due to an increase in the resource base or due to an increase in the level of technology. An increase in the resource base means an increase in the following factors of production; capital, land and human resource (Ernest & Bulent, 1996). An increase in the level of technology means the use of advance technology. For example the use of automated systems which means an increase in production with a reduction in the costs of human resource. The level of technology in beer production has shown a steady advancement from local brewing to bulk brewing and the use of automated systems to provide the necessary brewing conditions. It is therefore noted that economies grow when the population grows because labor is a very vital resource. For example the population in the United States grew to 90 million from 5 million during the 1800 to 1900 period. Economic growth also manifests itself when the existing resources are used effectively. This is what is known as technological progress. This yields a shift outward of the production possibilities frontier. Economic growth is represented in the graph below; Conclusion The concept of scarcity is an important aspect of economics since an individual’s way of living is determined by it. This is because people wants and needs are recurrent and insatiable and thus the concept of choice is manifested and hence opportunity cost is brought about. The economy is also affected by scarcity since limited resources means the production of a certain type of good at the expense of another. This requires for there to be very prudent economists in order to make the right decisions in which goods and services to produce more of so as ensuring the advancement of the economy at large. All in all opportunity cost is part and parcel of our day to day lives and the management of scarcity is imperative. References Ernest, R. & Bulent, U. (1996). International Journal of Social Economics. [Online]. 23(7) pp. 49-56 [Accessed 7th April 2010]. Available at: Raiklin, E. (2000). Graphing and Slopes. [Online]. 40 (4) pp. 10-13 [Accessed 7th April 2010]. Available at: http://www.humboldt.edu/^economic/econ104/scarcity/ Rudolf, K. (2004). Needs and Wants. [Online]. 25 (6) pp. 5-8. [Accessed 7th April 2010]. Available at: http://www.accessmylibrary.com/article-1G1-18685655/relativity-concepts-needs-wants.html COPYRIGHT 1993 Emerald Group Publishing, Ltd. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan.  All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information) Read More