Scarcity, Opportunity Cost, and Economic Growth

1 THE ECONOMIC PROBLEM LEARNING OBJECTIVES Understand the problem of scarcity Understand opportunity cost Understand production possibility curves Understand causes of positive and negative economic growth SUBJECT VOCABULARY goods things that are produced in order to be sold GETTING STARTED The planet we live on contains many resources that are used to produce goods we like to consume. However, there is a problem. Look at the images below. CASE STUDY: RESOURCES AND NEEDS OIL ▲ Figure 1.1 Valuable resources ▲ Figure 1.2 Needs 1 Describe the resources shown in Figure 1.1. 2 Are there enough of these resources in the world? Explain your answer with reference to the images in Figure 1.2. 3 In groups, discuss whether your country has enough resources. Draw up a list of measures that your government might take to increase the quantity of resources available. Present your ideas to the rest of the class THE PROBLEM OF SCARCITY SUBJECT VOCABULARY finite having an end or a limit GENERAL VOCABULARY fertile soil ground that is capable of producing crops GENERAL VOCABULARY health care activity of looking after people's health, considered to be an industry needs basic requirements for human survival wants people's desires for goods and services SUBJECT VOCABULARY infinite without limits FINITE RESOURCES All countries have resources, such as water, minerals, soil, plants, animals and people. However, in any country there is a finite quantity of these resources, which means that the quantity available is limited. As there is only a limited quantity, economists say that resources are scarce. These resources are often referred to as the four factors of production: land, labour, capital and enterprise (see Chapter 14). Resources are scarcer in some countries than others. For example, in some African countries there are serious shortages of fertile soil and water. This means that food production is inadequate. Even where resources exist, a country may not be capable of exploiting them. For example, Ethiopia struggles to produce enough food for its population because only about 4 per cent of its fertile land is irrigated. The problem is not a shortage of water but the failure to exploit some of its huge rivers, such as the Awash and the Blue Nile. The country does not have the financial resources to invest in projects that would make use of the water for agriculture. UNLIMITED WANTS Economists distinguish between needs and wants. Needs are the basic requirements for human survival. Some of these needs are physical and include water, food, warmth, shelter and clothing. If these needs cannot be satisfied, eventually humans would cease to exist. In some countries in the world people do die because such needs cannot be met. In addition to basic needs, humans also have other desires. These are called wants and may include more holidays abroad, a better house, more meals out, a bigger car, new golf clubs, a better education, improved health care and a cleaner environment. These wants are unlimited or infinite. People always want more whatever their current circumstances; it is human nature. The problem is made worse because many of the things that people want have to be replaced. Consumers regularly replace cars, computers, shoes, clothes and furniture, for example, either because they are no longer functional, or because better or more fashionable versions have become available. ACTIVITY 1 CASE STUDY: NEED AND WANTS ▲ Figure 1.3 Different eating arrangements 1 How might the two images in Figure 1.3 illustrate the differences between needs and wants? 2 Why are resources finite? THE ECONOMIC PROBLEM SUBJECT VOCABULARY basic economic problem allocation of a nation's scarce resources between competing uses that represent infinite wants scarce resources amount of resources available when supply is limited GENERAL VOCABULARY allocate to decide officially that a particular amount of money, time, etc. should be used for a particular purpose KEY FACTS In China, many clothes manufacturers use large quantities of labour in production. However, in many Western countries the same goods may be produced using high-tech machinery. GENERAL VOCABULARY distribution act of sharing things among a large group of people in a planned way All countries have to deal with what economists call the basic economic problem. The problem, summarised in Figure 1.4, occurs because the world's resources are scarce or finite and people's wants are infinite. Demand for resources is greater than their supply. As a result, decisions have to be made about how to allocate a nation's scarce resources between different uses. This is what the study of economics is all about. Infinite wants DEMAND > Finite or scarce resources SUPPLY Basic economic problem What to produce? How to produce? For whom to produce? ▲ Figure 1.4 The basic economic problem To overcome the basic economic problem, important decisions have to be made. What to produce? Because it is impossible to produce all the goods that people want, a country must decide which goods will be produced. For example, should resources be used to provide more libraries, build more schools, expand the armed forces, make more cars, build more houses, construct more roads, make more toys, print more books, increase state pensions or train more doctors? How to produce? Goods can be produced using a variety of different production methods. The four factors of production can be organised in different ways to produce the same goods. For whom to produce? Once goods have been produced, there has to be a method of distribution. This means that the goods have to be shared in some way between members of the population. For example, should everyone get exactly the same quantities or should some receive more than others? There are different solutions to the basic economic problem. This is because different courses of action can be taken when making the decisions outlined above. The way in which they are made depends on what sort of economic system a country has. This is explained in Chapter 11. OPPORTUNITY COST GENERAL VOCABULARY choices deciding between alternative uses of scare resources Whichever approach is used to solve the basic economic problem, all decision makers are faced with choices. Resources often have a number of alternative uses; as a result people have to make a choice about which way to use them. Individuals, producers and governments face this choice. Individuals have to choose how to spend their limited budgets. For example, a university student, after all living costs have been met, may have £50 left at the end of the week. This student would like to buy some new books (£20), get the train home for the weekend (£30), go out for a meal with