Economic resources are scarce not only because they are few in number. It doesn’t stand alone. You have to compare it with other concepts, namely needs and wants. Scarcity occurs because resources are limited to satisfy our unlimited needs and wants.
In this case, economics is a discipline dealing with scarcity. It discusses how to allocate limited resources to meet unlimited human needs and wants.
Scarcity gives rise to alternative economic choices. Economists then formulate various theories about how to make these choices to produce maximum results. Finally, through various theories and approaches, they try to explain and analyze the nature of choices faced by economic agents, such as consumers and producers.
What are economic resources? What are needs and wants? Let’s discuss them one by one.
Definition of economic resources
Economic resources refer to the inputs used to produce goods and services. They include tangible things like land and capital goods and intangibles like entrepreneurship. They provide us with economic benefits, namely satisfying our needs and wants through businesses’ goods and services.
Another name for economic resources is factors of production. Sometimes we also refer to it briefly as input or resource.
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Economists categorize economic resources into four types. They are:
- Land – not just land for agriculture, plantations, office building sites, factories, or retail space. But, there are also various natural resources on earth, both renewable and non-renewable such as wood, fish, petroleum, coal, gold, silver, copper, iron, and aluminum.
- Labor – the individuals’ mental and physical effort to help the production process. It is not only about operating production machines but also includes the knowledge, skills, health, and experience inherent in workers.
- Capital – man-made tools used to produce goods and services. Businesses use them directly to process inputs into outputs. Economists exclude financial capital such as money, stocks, and debt securities from this category because they are not used directly to produce goods and services.
- Entrepreneurship – an individual’s attempt, by taking risks, to run a business. We call this individual an entrepreneur. They bring together the other three factors, organize activities and operate the business.
Definition of needs and wants
Needs are essential for us to survive. Without fulfilling it, we cannot live normally. For example, we need food and drink because, without them, we die.
Meanwhile, wants are something less essential. It may only affect our image or prestige. And, if we don’t fulfill it, it won’t kill us. For example, we want a car. Without cars, we don’t die. But, owning a car makes us confident and proud.
Wants are unlimited because we are never satisfied with what we have right now. It usually correlates with our income level. If we have a motorcycle, we want a car. And after owning a car, we might want a private jet. It is often correlated with the level of income we have.
Take another example. We crave a healthy life. Therefore, we want to consume organic food and avoid the junk foods we usually consume. But, for example, because we do not have sufficient resources, such as money, we cannot satisfy our desires.
Reasons for scarce economic resources
As I have already mentioned, our needs and wants are limitless. But, to fulfill them, we have limited resources. Scarcity then appears. So, the reason for the scarcity is limited availability to satisfy something infinite. If our needs and wants were limited, scarcity would not exist – and so would economics.
Resources can take on various dimensions, including money and time. But, in economics, it simply refers to the inputs used to produce goods and services.
Furthermore, economics links needs and wants with economic resources. Scarcity gives rise to economic choices about how to allocate economic resources to their highest use.
In microeconomics, economists develop theories of consumer choice and production possibilities curves. For example, consumer choice theory explains how consumers maximize their satisfaction by considering the budget they have. Satisfaction represents the consumer’s goal in meeting needs and wants by consuming goods and services. Meanwhile, the budget represents the resources owned by consumers.
Meanwhile, the production possibilities curve explains how the company can produce the maximum combination of goods and services using existing resources.
Furthermore, in macroeconomics, economic choices give rise to ideas about how a country allocates resources to meet its citizens’ needs and wants. And, it depends on the chosen economic system, whether it is a free-market economy, a command economy, or a mixed economy.
For example, under a command economy, decisions about economic resource allocation are under the control of the government. The government makes all decisions, including deciding what goods and services to produce, how to produce them, and for whom these goods and services are produced.
In contrast, under a free market economy, all these decisions are in the hands of the private sector. The government does not intervene.
Currently, some countries are adopting a mixed economic system with some variations. For example, the government is more dominant in some countries, such as China and North Korea. Meanwhile, the private sector plays a larger role in other countries like the United States and Japan.
How many resources does a country have? That is the endowments factor, which can be labor, land, capital, and entrepreneurship.
Some countries have abundant natural resources. Therefore, they can use it to fulfill the needs and wants of their citizens.
So what about poor natural resources countries? Yes, they have to buy. To buy, of course, they had to make money.
These countries make money and develop economies with a focus on the other three factors of production. They spur entrepreneurship, investing in human capital and capital goods technology. Often, these three contribute significantly more to making money and developing the economy than countries rich in natural resources.
You can look at Japan and South Korea. Both are poor in natural resources. However, both can become developed countries because they invest in these three factors.
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?