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Scarcity
This article discusses the concept of scarcity in microeconomics. It covers the two types of scarcity (absolute and relative), and how scarcity informs the decisions we make. It also touches on key concepts like opportunity cost, supply and demand, and how different economic systems handle scarcity differently.
Scarcity in microeconomics
Imagine going to the store with only $10 to spend. You find two items you really want: a book and a movie. Unfortunately, you can't afford both. You have to make a choice. This is an example of scarcity in action.
In microeconomics, scarcity refers to the idea that resources are limited. It applies to physical resources like land, water, and oil, as well as intangible resources like time, skills, and attention. We have to make choices about how to allocate those resources.
There are two main types of scarcity: absolute and relative. Absolute scarcity refers to the physical limitations of resources, while relative scarcity refers to the value we place on resources. For example, diamonds are not absolutely scarce, but we as a society value them highly, so they are relatively scarce.
Scarcity is the foundation of microeconomics. It helps us understand how people make decisions in the face of limited resources. When resources are scarce, we need to weigh the pros and cons of different options and choose the one that makes the most sense for us. This is where concepts like opportunity cost come in. Opportunity cost is the value of what we give up when we choose one option over another.
In microeconomics, we also look at how prices help allocate resources. When something is scarce, the price tends to go up. This, in turn, encourages people to use the resource more efficiently or look for substitutes.
Different economic systems handle scarcity differently. In a capitalist system, prices and market forces are used to allocate resources. In a planned economy, on the other hand, the government may step in to determine how resources are used.
Frequently asked questions
What is scarcity in microeconomics?
- Scarcity refers to the idea that resources are limited, and that we need to make choices about how to allocate them.
What are the two types of scarcity?
- Absolute scarcity (physical limitations) and relative scarcity (the value we place on resources).
What is absolute scarcity?
- The physical limitations of resources, such as land, water, and oil.
What is relative scarcity?
- The value we place on resources, such as diamonds, which makes them scarce even though they are not absolutely scarce.
Why is scarcity important in microeconomics?
- It underpins the entire field, and helps us understand how people make decisions in the face of limited resources.
What is opportunity cost?
- The value of what we give up when we choose one option over another.
How do supply and demand interact with scarcity?
- When resources are scarce, prices tend to go up, which in turn affects supply and demand.
How do prices help allocate scarce resources?
- When prices go up, people tend to use resources more efficiently or look for substitutes.
What are some incentives that can be used to influence decisions in the face of scarcity?
- Prices, taxes, subsidies, and regulations can all be used to incentivize people to use resources more efficiently.
How do different economic systems handle scarcity differently?
- In a capitalist system, prices and market forces are used to allocate resources, while in a planned economy, the government might step in to make those decisions.
Want to join the conversation?
Will relative scarcity on oil and gas decrease as the economy shifts to electric powered objects?(4 votes)
It would ultimately depend upon the pace of transition to EV adopted by the world over time. Also, one would need to understand that even if petrol isn't used by a country, petrochemicals would still be needed for pharmaceuticals, metal-polymer composites and other applications, thus ensuring that the demand for oil remains at a certain level. This means that the relative scarcity may decrease, but not to the extent forecasted.(5 votes)
Scarcity is the main reason why economics exists.
So how can one allocate his or her resources well?(2 votes)
Allocating your resources is all about understanding the opportunity cost of a particular good. Allocation of resources should be efficient and on the marginal benefit curve. You'll learn about that in later videos:
https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/basic-economic-concepts/production-possibilities-curve-ppc/v/opportunity-cost(2 votes)
- The article says that oil is absolutely scarce. It also says that diamond is not absolutely scarce. But there is less diamond than oil on earth. So, isn't diamond both absolutely and relatively scarce?(1 vote)
- Good question. Recall that determining how 'scarce' a good is depends on determining its demand. Oil is considered a necessity, whereas diamonds are a luxury good. Therefore, these two goods have different scarcities.(2 votes)
