1.2 SCARCITY, CHOICE AND OPPORTUNITY COST

As a student, you may sometimes face the problem of wanting more than what you can afford. This is known as the basic economic problem. You might have to postpone your plan of buying new things or not eating in your favourite restaurant in order for you to pay your tuition fees and buy text books. You may also need more time for studies, meeting friends or sleeping. Limited income and time force you to make choices on the best way to divide your income and time. It is the same with the society; they also have to choose from various feasible alternatives.
Hence, an economist observes most issues based on cost and benefits. Attention given towards cost and benefit emerges as a result of the problems of scarcity.

1.2.1 Problems of Scarcity

What does “problem of scarcity” mean?
Individual and societal needs for consumer goods, capital goods and others are endless and unlimited. However, the ability to fulfil all the needs, that is, the goods and services able to be produced, is limited. This is caused by scarcity of resources needed to produce the particular goods.

Scarcity problem emerges when our material needs exceed the ability to fulfil them due to limited resources.

Thus, choices made by individuals and society that lead to scarcity problems is the major issue in economics.
Scarcity is a relative concept. For instance, even though the production of crude oil is high, oil is considered to be a scarce resource because many people need it and are not able to obtain as much as they need of it free-of-charge.

Economics is a research on how individuals and society choose to utilise limited resources to fulfil their unlimited material needs in the best or most optimum manner.

The problems of scarcity can partly be resolved by:

1. Fully utilising all resources;
2. Upgrading the capacity of resources and technology;
3. Upgrading the administration efficiency for production and distribution; and
4. Redistributing goods or income among the members of the society.

1.2.2 Choice and Opportunity Cost

As concluded from the definition of economics, two basic issues in economics are:

1. The need to make choices; and
2. Identifying the opportunity cost for making a specific choice.

Individuals and society need to make choices among various alternatives; and opportunity cost is the value for the best alternative forgone.

Cost and benefit evaluation is the basis for making choices. In economics, cost and benefit evaluation is not an easy task because it requires accurate measurement. However, the concept of opportunity cost is suitable to be used as an accurate method of measuring cost and benefit in economics. The opportunity cost for carrying out a specific activity is the best benefit that had to be foregone for carrying out the particular activity. The foregone benefit is the benefit that could have been enjoyed if the best alternative was chosen. 

To pursue the benefit from one best activity, we have to sacrifice the other alternative which is the next best alternative. All choices with alternatives involve opportunity cost.

For example, you have been given a choice by your father whether to go for an overseas tour or to have a car as a reward for your success in obtaining a first-class honours degree. You consider your options as you have always craved for both alternatives. If you choose to have an overseas tour, then the opportunity cost for the overseas tour is the value of a car. On the other hand, if you choose the car, the opportunity cost is the opportunity to go on an overseas tour.