Scarcity & Choices

• What is scarcity?


  The fundamental economic problem is scarcity; having unlimited human wants with limited resources. This would mean that choices need to be made as to how, what and for whom to produce. The factors of production, namely land, labour, capital and enterprise, would have to be utilised to allocate and answer these questions. It also implies economic agents such as consumers, governments and firms cannot have all that they desire and must decide what their most pressing needs and wants are.
• P2: Opportunity cost


  Yet, when choices are made, the next best alternative is foregone. This means that when these decisions are made, there is an opportunity cost and trade-off because the use of resources for one goods implies forgoing the opportunity to produce another. The diagram below shows a production possibility curve, which illustrates the opportunity cost of increasing the supply of good Y compared to good X (as good Y increases, good X decreases).