Question

Explain why the scarcity of resources causes people and nations to consider opportunity costs and trade-offs among choices.

Answer 1

In order to understand the situation in which due to scarcity of resources, people and nations consider opportunity costs and trade offs, let us first understand what these terms mean.

Opportunity Cost refers to the cost of what you have to forgo in order to gain what you want. This is an economic concept that makes a person choose the most valuable choice out of the two alternatives. This is a very significant concept that shows the relationship between scarcity and choice.Trade-offs refers to a situation in which a strategic choice is made wherein a compromise has to be done in order to gain another alternative.

In economics, the main core concept is scarcity, in which for our unlimited wants there are limited resources. As we cannot have everything, we need to make limited choices. We need to identify what to produce, how to produce and for whom to produce the goods and services. Therefore, whichever choice we make, we have to do a trade-off in which, if we want to get something, we have to give something up. This leads to an opportunity cost of what we gave up because we made a choice in using our resources in one way, which resulted in loosing the opportunity to utilize our resources in another way.

Individuals and nations sort out for opportunity cost and trade off choices due to the scarcity of resources. Therefore, since resources are scarce, nations and people who want to use their resources have to make a decision about how to use it. For instance, if you are furniture manufacturer, you are going to use scarce resources like the wood for the furniture, the time of the employees and equipments to make it. If you choose to make one bed, you are choosing not to make a sofa. As the resources you have are scarce, you have to make a choice and a trade off of producing one product or the other. Similarly, a country has limited resources and budget. If the government of a country decides to increase its defense expenditure in order to provide arms and ammunition for its defense forces, it will have to reduce its expenditure on infrastructure development, agriculture etc.

Therefore, it is in society's interest that we consider opportunity cost and trade offs because of scarcity of resources.