1.4 - Scarcity, choice and the allocation of resources

What is the fundamental economic problem?

How best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare

What is scarcity?

Limited quantities of resources to meet unlimited wants

What is an example of scarcity?

if you only have £1 and you go to a shop, you can buy either the chocolate bar or the packet of crisps. The scarcity of the resource (the money) means a choice has to be made between the chocolate and the crisps.

Why is choice important in the fundamental economic problem?

If goods are scarce and incomes are limited, a choice or choices have to be made.

What is opportunity cost?

The cost of giving up the next best alternative

Why is opportunity cost related to scarcity?

A need for choice arises whenever an economic agent has to choose between two or more alternatives which are mutually exclusive, in the sense that it is impossible or impractical to achieve both at the same time. In the jargon of economics, an opportunity cost in involved