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Concepts of Scarcity, Opportunity Costs, and Choices
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SSC351--Improving Office Productivity Through TQM
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SSC351 Study Guide

Resources are scarce.  That means every time we make a choice to use a resource one way, we've given up the opportunity to utilize it another way.  That's easy to see in our own lives, where we must constantly decide what to do with our limited time and income.  Should we go to a movie or study for next week's test?  Should we buy a car or repair the roof?  Should we get a degree or begin work right after completing our diploma programme?  In each of these cases, making a choice in effect costs us the opportunity to do something else.  The alternative forgone is called the opportunity cost.


Unlimited Wants

Humans have many different types of wants and needs. Economics looks only at man's material wants and needs. These are satisfied by consuming (using) either goods (physical items such as food) or services (non-physical items such as heating).

There are three reasons why wants and needs are virtually unlimited:

  1. Goods eventually wear out and need to be replaced.
  2. New or improved products become available.
  3. People get fed up with what they already own.

Limited Resources

Commodities (goods and services) are produced by using resources. The resources shown in Table 1.1 are sometimes called factors of production.

Table 1.1 Different types of resource

Type Description Reward
Land All natural resources Rent
Labour The physical and mental work of people Wages
Capital All man-made tools and machines Interest
Enterprise All managers and organisers Profit

Types of Commodity

A free good is available without the use of resources. There is zero opportunity cost, for example air. An economic good is a commodity in limited supply.

Expenditure on producer or capital goods is called investment.

The Economic Problem

The economic problem refers to the scarcity of commodities. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.

Society has to decide which commodities to make. For example, do we make missiles or hospitals? We have to decide how to make those commodities. Do we employ robot arms or workers? Who is going to use the goods that are eventually made? Do we build a sports hall in Wigan or Woking?

Opportunity Cost

The opportunity cost principle states the cost of one good in terms of the next best alternative. For example, a gardener decides to grow carrots on his allotment. The opportunity cost of his carrot harvest is the alternative crop that might have been grown instead (eg potatoes). Further examples are given in Table 1.2.

Table 1.2 Examples of opportunity cost decisions

Group Decision
Individual Should I buy a record or a revision book?
School Should we build a music block or tennis courts?
Country Should we increase police pay or pensions?

Economic Systems

An economic system is the way a society sets about allocating (deciding) which goods to produce and in which quantities. Different countries have different methods of tackling the economic problem. There are three main types of economy.

Market Economies

A market or capitalist economy is where resources are allocated by prices without government intervention. The USA and Hong Kong are new examples of market economies where firms decide the type and quantity of goods to be made in response to consumers. An increase in the price of one good encourages producers to switch resources into the production of that commodity. Consumers decide the type and quantity of goods to be bought. A decrease in the price of one good encourages consumers to switch to buying that commodity. People on high incomes are able to buy more goods and services than are the less well off.

Command Economies

In a command-planned or socialist economy the government owns most resources and decides on the type and quantity of a good to be made. The USSR and North Korea are examples of command economies. The government sets output targets for each district and factory and allocates the necessary resources. Incomes are often more evenly spread out than in other types of economy.

Mixed Economies

In a mixed economy privately owned firms generally produce goods while the government organises the manufacture of essential goods and services such as education and health care. The United Kingdom is an example of a mixed economy.

rtunity cost is the value of the good or service forgone.