Chapter 1: Problem 6

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

Expert verified

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.

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