Way to economics 05

Way to economics 05

Analyses the central problem of economics, logically.

 Scarcity is the central economic problem common to every economy.
 It is a relative concept(which means compared to human wants resources are
relatively limited).
 This does not mean the total absence of resources (Relative search).

 The problem of scarcity arises with the existence of two main characteristics
of a society they are as follows

1. At a given period of time human wants being unlimited.
2. At a given period of time resources used to produce goods and services
to fulfil human wants being limited.

 The shortage of goods prevailing at the market is not considered as scarcity as
the shortage arises with the delay of stocks and this shortage disappears with
the arrival of stocks.
 The goods produced with scarce resources are called economic goods and the
supply of these goods are limited.
 Use of resources economically is considered as efficient utilization of
resources. However until wants remain unlimited, this economic use of
resources would not solve the problem of scarcity.

 Scarcity is considered as the central problem of economics due to the
following reasons,

1. It is common to every society.
2. As any society would commonly face the problems of what to produce
in what quantity, how to produce and whom to produce.
 Since scarce resources have alternative uses, instead of selecting many,
people have to choose one alternative.
For Example- when considering land it has alternative uses such as
constructing of factories, farming and making of play grounds, therefore a
decision has to be made in selecting one alternative.
 In this regard it has to be subjectively ordered which wants should be fulfilled
first and which wants are expected to be fulfilled later.
 Choices are made by households, business firms and the government in
various ways .
 The problem of choice arises in an economic system due to
1. Scarcity of resources
2. Based on alternative uses of resources
 In this way when selecting one alternative from all other alternatives available,
the value of the next best alternative forgone is called opportunity cost.

 Opportunity cost is also named as real cost and as economic cost.
For example the alternatives for land available to a person in the
above example can be stated as follows according to its priority.

1. Constructing of a factory
2. Farming
3. Building of a play ground

 When selecting the alternative of constructing of a factory the next best
alternative forgone would be the alternative of farming and therefore the
opportunity cost of constructing a factory is the harvest that can be obtained
by farming.
 Opportunity cost is considered as a positive concept and opportunity cost is
positive only with economic goods.

 Important factors relating to the opportunity cost of a choice are as follows,

1. The concept of opportunity cost is not a financial concept. It is a real
concept, which means the opportunity cost concept shows the real
value of the next best alternative forgone when selecting an
alternative. It is not the financial value.
2. Opportunity cost concept is connected to the individual. Therefore
opportunity cost can be expressed only by the person who made the
choice. It differs from person to person.
3. There is an external cost which occurs with opportunity cost.

 There are a few situations where opportunity cost can be zero.

1. When there are unlimited resources(Existence of non-economic goods)
2. Absence of alternative uses.
3. When there are unemployed resources.