What this lesson teaches
I can define the basic economic problem and give examples of scarcity for consumers, workers, firms and governments.
Syllabus K343, 1.1.1. Finite resources and infinite wants: definition of the basic economic problem; the concept of scarcity; examples of the basic economic problem in the context of: consumers, workers, producers/firms, governments
Make a guess
A billionaire can buy anything in a shop. Does she face scarcity?
- Yes. Her time and the world's resources are still limited.
- No. Scarcity affects people who are short of money, not the rich.
- No, because she can afford everything she wants.
Show the answer
Yes. Her time and the world's resources are still limited.
Scarcity means wants are greater than resources. Even a billionaire has only 24 hours a day and cannot have every resource used only for her.
Wants are unlimited but resources are limited, so every person, firm and government must choose.
The basic economic problem is that resources are finite but wants are infinite. Resources are the land, workers, machines and skills used to make goods and services. There is only so much of each. Yet people always want more: better phones, bigger homes, more holidays.
Scarcity means there are not enough resources to satisfy everyone's wants. It does not mean something is rare. Scarcity applies to everyone, even rich people and rich countries, because their wants also keep growing.
Scarcity forces choice. A consumer has a limited income. A worker has limited time and skills. A firm has a limited budget, staff and factory space. A government has limited tax revenue. Each must decide how to use what it has.
- Basic economic problem
- Finite resources cannot satisfy infinite wants.
- Scarcity
- Not enough resources to satisfy all wants, so choices must be made.
- Who faces scarcity
- Consumers, workers, producers/firms and governments.
Worked example: Scarcity for four decision-makers
The basic economic problem shows up differently for each group. A strong answer names who is choosing and what is limited.
- Consumer: a student with $50 a week cannot buy every game, snack and outing they want.
- Worker: a nurse has limited hours, so extra overtime means less time for rest or study.
- Firm: a bubble tea chain has one budget, so opening a new outlet may mean delaying new equipment.
- Government: Singapore's Budget must divide limited revenue between healthcare, education, defence and housing.
Watch out for this
Scarcity only affects poor people and poor countries.
Scarcity affects everyone because wants are unlimited for everyone. A wealthy country still cannot build every road, hospital and school its people want at once.
Check your understanding
Which situation shows scarcity forcing a choice?
- A beach has far more sand than its many visitors could ever take home.
- A seaside town has more sea breeze than its people could ever need.
- A council must choose a park or a car park for one plot.
Show the answer
A council must choose a park or a car park for one plot.
Right. The land can serve only one use, so choosing one means giving up the other.
Check your understanding
A government has $1 billion and receives requests for $3 billion of new projects. What does this illustrate?
- Market failure: the market has produced too little.
- Scarcity: limited resources must be allocated between competing uses.
- A free good: the government does not have to pay for the projects.
Show the answer
Scarcity: limited resources must be allocated between competing uses.
Yes. The government cannot fund every project, so it must choose.
Check your understanding
Which statement best describes the basic economic problem?
- Firms do not produce enough goods for everyone
- Limited resources cannot satisfy unlimited wants
- Prices of most goods are too high
- Some people are much poorer than others
Show the answer
Limited resources cannot satisfy unlimited wants
Right. Scarcity means there is never enough to meet every want, so choices must be made.