8/4/2019 Essay One - Explain What is Meant by the Term Scarcity. Assess if the Use of Economics Can Help to Solve This Problem

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EXPLAIN WHAT IS MEANT BY THE TERM SCARCITY. ASSESS IF THE USE OF ECONOMICS CAN

HELP TO SOLVE THIS PROBLEM Scarcity is a relative concept that relates the extent humans wants to his ability to fulfill his

desires. Scarcity in basic terms means not having enough. Two basic assumptions surround

the problem of scarcity.

Firstly, we assume that humans wants are unlimited, that is, no matter how much her has,

he still desire more of it. For example, if he has 10 cars he would still want an addition car.

He would never be satisfied and in crude terms, he is greedy.

Secondly, we assume that resources are finite. For instance, in the case of Singapore, there

is limited land. In Saudi Arabia, there is only a finite amount of crude oil. It is limited amount

of resources and unlimited wants that result in scarcity.

For example, the diagram below shows the production possibility curve of an economy,producing only 2 goods, ceteris paribus.

(insert a curve). Opportunity cost is present as the increase in production of clothes must be

accompanied by the reduced production of food. Opportunity cost is defined as the next

best alternative forgone when a choice is made. Scarcity is the root of opportunity as there

are limited resources and unlimited wants. Thus, we can only produce more of one good at

the expense of the other good.

Economics cannot solve the problem of scarcity given the two assumptions: unlimited wants

and limited resources. We can only use economics to help us in the allocation of resourcesso as to maximize utilization of these resources to satisfy mans wants.

There are different methods used in resources allocation. In a free market economy, price

mechanism is responsible for the free interaction of demand and supply to set the price,

which in turn directs the economy on what to produce, how to produce and for whom to

produce. Through the changes in prices, firms seeking to maximize their revenue reallocate

resources to producing the new relatively more profitable goods. For instance, if price of

lamps rises, firms would want to produce more of lamps as it is now relatively more

profitable, assuming there are only two goods. Also, in a free market economy, there is

limited or no government intervention. The production of goods and services will notaffected by imposed taxes, subsidies, price controls or any policy that interferes with

producer decisions. In addition, consumers are entitled to freedom of choice based on self-

interest. Firms are thus able to minimize the total cost of production and at the same time

increase efficiency. This helps to achieve productive efficiency. As a result, firms will be able

to produce goods that are demanded by the consumers and in turn achieving allocative

efficiency.

At the other extreme, in a centrally planned economy, only the government is responsible

for the allocation of resources. All economic decisions are made by the government as

factors of production and resources are owned by the government. Therefore, theallocation of resources is decided by the government.

8/4/2019 Essay One - Explain What is Meant by the Term Scarcity. Assess if the Use of Economics Can Help to Solve This Problem

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In both cases, scarcity sill remains though they do reduce the problem of scarcity. This is

because the assumptions unlimited wants the limited resources still hold true. With these

assumptions, man always wants more although resources are limited. Both economies

allocate resources according to mans wants, thus, part of mans wants is being satisfied and

problems of scarcity reduced.

The way economists make decision is based on the additional cost and the additional

benefits of the outcome of that decision. This is generally known as cost benefit analysis. For

instance, if the additional cost of consuming a cheeseburger is more than the additional

benefit derived from the consumption of the cheeseburger, the person should not consume

the cheeseburger. Thus, economics analysis merely dictates what decision we should take

so that we can satisfy our wants and reduce the problems caused by scarcity. Hence, the

way of economic analysis does not solve scarcity.

In addition, there are also other economic theories, for instance, Keynesian theories onemployment, economic growth and other macroeconomic issues. These play important

roles in accessing the situation an economy is currently facing. In fact, the intentions of

these theories are not to solve scarcity, but rather to assist in the reallocation of resources

according to what is wanted and needed in an economy.

In lieu of the above, it is evident that economics do not completely solve scarcity, though it

can assist us to make better decisions among competing options so that we could have

control over scarcity.