Scarcity | Choice | Opportunity Cost

Three big questions summarise the scope of economics- How do choices end up determining what, how, and for whom goods and services are produced?

Goods and services are the objects that people value and produce to satisfy human wants. What we produce varies across countries and changes over time. The question is what determines these patterns of production? How do choices end up in determining the quantities of goods and services produced around the world?

So, still considering the basic economic problem, let’s also consider the factors below.

Factors of Production

Goods and services produced by using productive resources are called factors of production. They can be grouped into four categories: Land, Labour, Capital, and Entrepreneurship.

• The land is the “gifts of nature” that provide the basic premises for producing goods and services. In economics, land is what in an every-day language is called natural resources.
• Labour, measured in man days or man years, is the work time and work effort that people devote to producing goods and services. Labour includes the physical and mental efforts of all the people who work on farms and construction sites and in factories, shops, and offices.
• Capital consists of the tools, instruments, plant and machinery, buildings, and other constructions that are employed to produce goods and services.
• Entrepreneurship – the human resource involved in organizing and bringing together land, labor, and capital for efficient production. Entrepreneurs come up with new ideas about what and how to produce, make business decisions, and bear the risks that arise from these decisions.

Economics provides some answers to all these questions about what, how, and for whom goods and services are produced and this article will help you to understand the answers to these questions.

Scarcity: Our wants and desires for economic goods are very great compared to our ability to satisfy them. This forces us to make choices among different desirable things. The fact that there are not sufficient resources to produce everything that individuals want gives rise to the economic problem of scarcity. There can never be enough of everything to satisfy everyone’s wants for all goods and services.

Since wants are insatiable and resources available are limited, individuals must make choices; they must economize.

The big question is, Are wants insatiable?

Yes. Our wants and desires for economic goods are very great compared to our ability to satisfy them. Therefore, the resources available to satisfy our wants are limited.

• Choice: Choices are necessary on account of resource constraints. Since wants are insatiable and resources are scarce, individuals must make choices. The economist’s term for costs expressed in terms of foregone alternative is an opportunity cost.
• Opportunity Cost: The concept of opportunity cost emphasizes the problem of choice by measuring the cost of obtaining a quantity of one commodity in terms of the number of other commodities that could have been obtained instead, or the benefit sacrificed.

That is the value of the next best opportunity given up in order to enjoy a particular good or service.

Opportunity cost is the monetary value of the next best opportunity given up in order to enjoy a particular good or service.