Explain the link between the basic economic problem of scarcity and opportunity cost.

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2a. Explain the link between the basic economic problem of scarcity and opportunity cost. [8] – Winter 2002

Scarcity is the excess of human wants over what can actually be produced. There are not enough of resources to satisfy everybody’s wants.

The problem arises due to the fact that as human we have unlimited wants, yet the resources – labour, land, capital and entrepreneur – are finite. The cost expressed in terms of the next best alternative foregone. One choice will be the ‘best’ one and a rational economic agent will take that alternative. But all the other choices will then have to be given up.

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Neither people’s wants nor their ability to produce goods and services are constant. Their productive potential is increasing all the time, but so their appetite for material things. As a result, scarcity will always exist. Given that human wants exceed what can actually be produced, potential demands will exceed potential supplies. For that reason, scarcity forces economic decision makers (individuals, families, firms, and governments) to make choices based on rationality. Making a choice normally involves a trade-off – this means that choosing more of one thing can only be achieved by giving up something else in exchange.  It confirms the adage: “there ain’t no ...

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