Question

1) Why is the concept of “scarcity” important for the discipline of economics?

2) Suppose we have a very simple economy – one that only produces beer and pizza. To keep the example simple, suppose this economy is using its resources to produce 20 pizzas and 100 cans of beer. Call this combination of output, A.

a) Suppose this same economy could have produced 22 pizzas and 105 cans of beer. Call this combination of output, B. Explain why this potential to produce B means that outcome A cannot be efficient.

b) Suppose this same economy could have produced 22 pizzas and 90 cans of beer. Call this combination of output, C. Explain why this potential to produce C does not necessarily mean that outcome A is inefficient.

Answer 1

1)

Scarcity refers to one of the basic economic problems that gives the gap between the limited resources and the unlimited wants of an economy. Thus, it represents such a situation wherein the means to fulfil the needs are limited and thus proves costly in an economy. It has to be noted that when the needs rise, even the freely available resource today would become scarce in the future. The following are the reasons why ‘scarcity’ is an important concept of economics

· With the knowledge of scarcity, it makes the society aware of the need to use the resource more efficiently so that it would not get exhausted

· The supply in an economy is always dependent on the demand and hence with scarcity of a product or service, the suppliers would now focus on how to optimally allocate the available resource in order to satisfy the basic needs of the society

· It helps in identifying the basic needs of a society and thus would be deterministic of the behavioural patterns in a society

· It allows the economy to set a short term, medium term and long-term target of how to meet the needs and thus would be helpful in setting the economic strategy both in terms of fiscal and monetary measures

· It would be helpful in determining the cost effectiveness of a plan that is currently in progress and may be impart a better plan in the future

· With the knowledge of scarcity of an economy, the balance of quality and cost would have to be redefined in an economy

· The trade off’s associated with the scarcity of a resource could be identified and plans could be arranged accordingly

· It helps the government to decide where the extra money should come from like raising of taxes, printing, borrowing etc.

Thus, we can see that ‘scarcity’ is an important concept in economics that helps in identifying the basic needs of an economy and indicates how the economy should adjust itself so as to accommodate the needs without exhausting the available resources in a judicial manner.