Economics can be defined as the allocation of scarce resources to provide for unlimited human wants.
Scarcity arises because there are insufficient resources to provide for everyone’s wants. It occurs in all economies, since resources are finite compared to human material want. Scarcity is obvious in countries the face famine a drought, where insufficient food or water is available to meet everyone’s needs. However, scarcity also exists in wealthy countries, since not all human material wants can be satisfied.
Scarcity means we have to make choices over the use of our limited resources to provide for our material wants. Some crucial decisions have to be made over hat, how and for whom to produce. These decisions face consumers, producers and the government. Once a decision has been made over what to use a resource for, opportunity cost arises.
Opportunity cost refers to the value of the next best alternative which is forgone. Consumers, producers and government all face opportunity cost.
A consumer may have £20 available to spend on a meal at a restaurant, or on the next best thing, which is a new t-shirt. The individual cannot buy both at the same time. If the consumer chooses to buy a meal then the opportunity cost is forgoing the new t-shirt.
A firm may have £50,000 available to invest in a new machine or to invest in a a training programme for employees. The managers have to make a choice over the best use of the funds.
A government may have an extra £100 million of tax revenue. It might be used to build a new hospital, but in doing so, forgoes the building of a large school, considered to be the nest best alternative.
Types of Resources
Resources, or factors of production, are inputs used to the production of goods and services. They are finite and can be classified into four types:
- Land – natural resources, such as oil
- Labour – the workforce
- Capital – an asset used in the production of goods or services, such as machinery
- Enterprise – the entrepreneurial, risk-taking skill of the people who combine these other factors
Renewable and non-renewable resources
A renewable resource is one whose stock level can be maintained over a period of time. These include solar energy, wind, water, oxygen, timber and soil. However, renewable resources may decline over time if they are sued at a faster rate than the environment can replenish them. They require careful management, to avoid such things as deforestation and soil erosion.
A non-renewable resource is one whose stock level is decreased over tim as it is consumed. These resources include fossil fuels such as coal, oil and gas. They also include commodities such as steel, copper and aluminium. It is possible to reduce the rate of decline of non-renewable resources through recycling and the development of substituted. The price mechanism also has a role to play in reducing the rate of consumption through higher prices.