4. Scarcity, choice and the allocation of resources

what is the economic problem

scarcity resulting from limited resources to satisfy unlimited wants

scarcity means that

Choices have to be made about how scarce resources are allocated between different uses

resources are _____ and wants are ______

limited

unlimited

opportunity cost

the value of the next best alternative forgone when a descision is made

In some cases opportunity cost excedes…

The monetary cost/price

Example of where opportunity cost excedes monetary value

Attending university

Opportunity cost = price of university + lost potential earnings

Issues with opportunity cost

1) not all factors have alternatives

2) some alternatives are unknown

3) Agents may lack information on alternatives to assign a monetary value

4) can be difficult to switch some factors to another use