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The ultimate consequence of scarcity is making choices. We face limited resources. But, on the other hand, we have limited needs and wants. So, we have to choose what goods we should produce. Another choice is how we make goods and for whom to produce them. They are the three fundamental questions in economics.
Ideally, the goods we produce are what we need and want most. And the way we produce them is the most efficient. And for whom production is for everyone equally regulated by the state (command economy) or determined by market mechanisms (market economy).
Consequences of scarcity
We need resources to produce goods and services to satisfy our wants. However, resources are often limited to what we need and want. As a result, scarcity arose. In general, scarcity occurs when our needs and wants are greater than the resources available to satisfy them.
There are several consequences of scarcity, including:
- Scarcity gives rise to choice, and each choice incurs an opportunity cost, an indirect result of scarcity
- Scarcity requires rationing because there are not enough resources to share among all.
- Scarcity drives competition, where everyone tries to get the resources they need and want.
Scarcity gives rise to choice
We have to make choices about resources because our wants are unlimited, while our resources are limited. Therefore, we must choose how we will use our limited resources. We must choose which desires we will try to satisfy and which desires we will leave unsatisfied.
For example, clothes and shoes are the things we want most. But, if we use available labor to produce clothes, they are unavailable to make shoes and vice versa. So, we have to choose which one we prioritize more. Say we use them proportionately, two-thirds for clothes and one-third for shoes.
In that example, we see we sacrifice something when we make a choice. For instance, less is available to produce shoes if we use more labor to produce clothes. So the potential for more shoes we can produce is at a cost to us. And we call these costs opportunity costs.
Opportunity cost represents the next best alternative that we don’t choose. Since clothes and shoes are the items we most desire, getting more shoes is the next best alternative we can give up if we decide to produce more clothes.
Another example is land. If we use the land for factory areas, the potential for obtaining agricultural products is the opportunity cost if agricultural land is the next best alternative to factory areas.
Long story short, making choices means we have to make trade-offs. So, we can get more of an item only at the expense of another item.
Choices and three questions in economics
The three fundamental questions in economics are:
- What goods do we produce?
- How do we produce them?
- For whom were they made?
Answering all three involves choices. Choosing shoes or clothing is an example of answering the first question above about what goods we produce. Answering this question requires us to detail the various alternative goods and determine which one we need and want most.
Meanwhile, answering the second question requires us to make choices about production techniques and technologies. For example, should we use more capital or labor? Do we rely on sophisticated machines or skilled hands?
The third question involves us making choices about how to distribute goods to everyone in the economy. The possible options are to hand it over to the market mechanism or hand it over to the government. The former option gives rise to a free market economy where supply and demand determine. Meanwhile, the last option gives rise to a command economy in which the government decides and regulates.
Scarcity requires rationing
Due to scarcity, we need rationing tools. Resources are not available abundant, and sufficient for everyone, as well as the goods we produce. As a result, we must decide how to distribute: who gets what and how much for available resources and goods.
Prices are the most widely used rationing tool in the modern economy. Prices ration all products to those willing and able to pay. So, if we want goods but can’t afford to pay, those goods will not be ours. This is because we can’t afford them.
The lower the price, the more people can afford to pay. Thus, goods can be rationed to many people. Conversely, few people can afford to pay when prices are high, which is closely related to scarcity. Scarcity makes the price more expensive.
Scarcity drives competition
Scarcity leads to competition. Competition arises because we try to get more resources to satisfy their wants and needs. For example, precious metal mines are available in a few locations. Several companies then competed for the right to mine them.
Meanwhile, everyone is trying to get the things they need and want at the market. If price were a rationing tool, then they would compete for money to be able to pay for and get more goods.
What to read next
- Economic Problem: Definition and 3 Basic Questions
- Scarcity in Economics: Meaning and Explanation
- Economic Resources: Definition, Types
- Needs: Definition, Example, Type
- Wants: Definition and Examples
- Choices in economic: Meaning, Importance, Reasons
- Opportunity Cost: Meaning, Importance, Examples
- Economic Efficiency: Meaning, Prerequisites, Why It Matters
- How are Economic Resources Allocated?
- Why Are Economic Resources Scarce?
- Why is Money Not an Economic Resource?
- Does Scarcity Only Work For The Poor? What Causes Scarcity?
- What Are the Consequences of Scarcity in Economics?
