Question

Explain the link between scarcity and each of the following: (a) choice, (b) opportunity cost, (c) the need for a rationing device, and (d) competition.

Short answer

Scarcity is linked to choice as limited resources necessitate decision-making. It's connected to opportunity cost because choices imply costs – the forgone alternatives. Scarcity necessitates a rationing device because there needs to be a method to distribute limited resources. Lastly, competition emerges due to scarcity as individuals and organizations compete for limited resources.

Step-by-step solution

Link between Scarcity and Choice

As resources are limited and cannot satisfy all human wants and needs, individuals, organisations and societies have to make choices. They must decide what goods or services they will use their limited resources on. This is the problem of choice.

Link between Scarcity and Opportunity Cost

Choosing one option invariably means giving up another option – this lost option is known as the opportunity cost. When resources are scarce, it forces individuals and organizations to make a choice about how to use these resources most effectively, and each choice comes with an associated opportunity cost. The concept of opportunity cost allows economists to examine the relative monetary values of various goods and services.

Link between Scarcity and the Need for a Rationing Device

Since there is scarcity of resources, there is a need for some sort of system to determine who gets what. This system, whatever it may be, is called a rationing device. It is a method for distributing goods and services when they are scarce.

Link between Scarcity and Competition

Due to scarcity of resources, buyers and sellers compete with each other for the limited goods and services available. Buyers compete with other buyers to purchase goods and services, while sellers compete with other sellers to sell to buyers. Competition is the mechanism through which scarcity leads to economic activity.

Key concepts

Choice

Whenever we face scarcity, the element of making choices inherently emerges. Scarcity means there are limited resources to fulfill unlimited wants and needs. Because of this limitation, individuals, companies, and even societies, must make choices about how to allocate these resources. Each choice entails selecting certain goods or services over others.

For example, if you have a fixed amount of money to spend, you might choose between buying a new textbook or going out for a meal. This decision-making process highlights the concept of choice linked to scarcity. Essentially, scarcity compels us to prioritize our desires and decide on the best way to satisfy them, even if it means sacrificing some wants in favor of others.

Opportunity Cost

Opportunity cost is a critical concept that arises from making choices in the face of scarcity. Since resources are limited, choosing to allocate them to one purpose means forgoing the alternative uses. That foregone alternative is known as the opportunity cost.

Imagine you decide to spend your time studying for an exam instead of working a part-time job. The money you could have earned at the job represents the opportunity cost of choosing to study. Opportunity cost provides us with insights into the value of the next best alternative, emphasizing the trade-offs that occur whenever a choice is made. It's a way to measure what we sacrifice when we make decisions under resource constraints.

Rationing Device

Scarcity naturally necessitates the use of a rationing device. Since not everyone can have what they desire due to limited resources, there needs to be a method to distribute these scarce goods and services effectively. A rationing device is essentially a system that determines who gets what in a world where demand exceeds supply.

This system can take various forms, such as prices, waiting lists, or even lottery systems. For instance, high prices might limit the number of people who can purchase a luxury car, effectively rationing the good to those with more financial means. The rationing device thus plays a critical role in allocation, ensuring resources are distributed—sometimes equitably, and other times based on who can pay the most.

Competition

In the landscape of economics, scarcity creates a battleground for resources, leading to competition. Buyers and sellers engage in competition due to the limited availability of goods and services. Buyers compete with each other to obtain desired items, often driving demand—and, consequently, prices—higher. In contrast, sellers strive to attract buyers to purchase their offerings, sometimes engaging in price wars or innovative product enhancements.

For instance, during high-demand periods, such as holiday shopping seasons, competition among buyers for the hottest items can lead to swift sell-outs and increased prices. On the sellers' side, they might introduce promotions to outpace competitors. Competition is a dynamic force fueled by scarcity, and it underpins much of the economic activity, fostering innovation, and efficiency in market systems.