Choice, Scarcity, Trade-Offs, Opportunity Costs, and Factors of Production
What Is Choice?
To start with, economics is the study of human behavior. More particularly, economics revolves around choice and its consequences. Economists study the choices people make and deduce the outcome of the economy based on the consequences of the choices. Without the concept of choice, economics would be completely different.
Making a choice is not limited to deciding between two products. It can also include daily decisions, such as sleeping in or studying.
Making a choice is not limited to deciding between two products. It can also include daily decisions, such as sleeping in or studying.
Trade-Offs and Opportunity Costs
When humans make choices, they are unknowingly involving trade-offs and opportunity costs, two fundamental aspects of choice.
Trade-offs and opportunity costs, although similar, each define a unique quality of choice.
Trade-offs are compromises or sacrifices made when people make choices.
Opportunity cost, on the other hand, is the option that is not chosen. If there are multiple options, opportunity cost is the value of the best alternative. One important thing to remember is that opportunity cost is not just the amount of money that would have been spent on the unchosen option. Instead, it is the value of the unchosen option. This value can also be time, benefits, money, and/or anything else that the next-best option would provide.
To make it easier to distinguish between trade-offs and opportunity costs, trade-offs are the scenario or situation of making a choice. Trade-offs cover a broader area of choice.
For instance, if you had to choose (make a trade-off) between a phone and a laptop, and you chose the laptop, the opportunity cost would be the phone because it was not chosen. Referring back, even in this case, the opportunity cost is not the amount of money that would have been spent on the phone. Instead, it is the benefits that the phone would have provided if chosen (the value of the phone). Meanwhile, the trade-off is the fact that a compromise had to be made between choosing a laptop and a phone.
Opportunity Cost Formula:
You can easily calculate opportunity cost in less than a minute using the following opportunity cost formula:
Opportunity Cost = Return/value of best unchosen option — return/value of chosen option.
This formula is very straightforward as it is merely the difference between the expected value of each option.
Trade-offs and opportunity costs, although similar, each define a unique quality of choice.
Trade-offs are compromises or sacrifices made when people make choices.
Opportunity cost, on the other hand, is the option that is not chosen. If there are multiple options, opportunity cost is the value of the best alternative. One important thing to remember is that opportunity cost is not just the amount of money that would have been spent on the unchosen option. Instead, it is the value of the unchosen option. This value can also be time, benefits, money, and/or anything else that the next-best option would provide.
To make it easier to distinguish between trade-offs and opportunity costs, trade-offs are the scenario or situation of making a choice. Trade-offs cover a broader area of choice.
For instance, if you had to choose (make a trade-off) between a phone and a laptop, and you chose the laptop, the opportunity cost would be the phone because it was not chosen. Referring back, even in this case, the opportunity cost is not the amount of money that would have been spent on the phone. Instead, it is the benefits that the phone would have provided if chosen (the value of the phone). Meanwhile, the trade-off is the fact that a compromise had to be made between choosing a laptop and a phone.
Opportunity Cost Formula:
You can easily calculate opportunity cost in less than a minute using the following opportunity cost formula:
Opportunity Cost = Return/value of best unchosen option — return/value of chosen option.
This formula is very straightforward as it is merely the difference between the expected value of each option.
Why Do We Have to Make Choices?
Although it has been established that humans make choices every day, what has not yet been discussed is why humans must make choices.
The reason behind this is scarcity. Scarcity is the most important factor of economics and the reason why people are compelled to make choices.
Scarcity occurs when resources are limited, but wants are insatiable. As a result, we cannot get everything we want, impelling us to make choices.
Scarcity applies to everyone, including the wealthiest businesses because when a business chooses to produce a lot of one item, it will have to limit the production of another item due to limited resources.
The products that require us to make a trade-off are known as scarce goods. Meanwhile, the products that do not require us to make a trade-off are known as free goods.
It is important to remember that in today's world, the majority of resources and goods are scarce.
Now that we know what scarce and free goods are, how can we determine whether a good is scarce or not?
The reason behind this is scarcity. Scarcity is the most important factor of economics and the reason why people are compelled to make choices.
Scarcity occurs when resources are limited, but wants are insatiable. As a result, we cannot get everything we want, impelling us to make choices.
Scarcity applies to everyone, including the wealthiest businesses because when a business chooses to produce a lot of one item, it will have to limit the production of another item due to limited resources.
The products that require us to make a trade-off are known as scarce goods. Meanwhile, the products that do not require us to make a trade-off are known as free goods.
It is important to remember that in today's world, the majority of resources and goods are scarce.
Now that we know what scarce and free goods are, how can we determine whether a good is scarce or not?
How to Determine if a Good Is Scarce or Not
Many think that a good is scarce if it is limited in quantity; however, they are incorrect. For a product to be scarce, it must meet 3 requirements: limited in quantity, desirable, and have more than one use.
For example, gold is scarce because many people want it, it can be used in many different ways (e.g. jewelry, gold bar, electronics), and it is limited in quantity.
Answer the following questions to check your understanding (answers with explanations are underneath)
Answers:
For example, gold is scarce because many people want it, it can be used in many different ways (e.g. jewelry, gold bar, electronics), and it is limited in quantity.
Answer the following questions to check your understanding (answers with explanations are underneath)
- Is garbage scarce?
- Assume a scientist discovers a new, rare element that has no use in any production process. Is the element scarce?
- Is clean air scarce?
- If a shoe store has in stock 1000 pairs of shoes, which sell for $40-60 a pair, are the shoes scarce?
Answers:
- Yes, because it is not desirable, limited in quantity, and nor does it have more than one use.
- No, because it has no use and therefore, not desirable. Although it’s limited in quantity, it is neither desirable nor has more than one use.
- Yes, because it is desirable by everyone, can be used for many purposes, and air is polluted in many areas (making clean air limited in quantity).
- Yes, because 1000 pairs limit the quantity, they can be used for many different purposes, and shoes, in general, are desirable by most people.
How to Solve Scarcity
Scarcity is a problem because most products and resources are scarce, causing conflicts on who can buy the products and use the resources.
Scarcity can not be eliminated, but there are ways to reduce it. 3 ways that scarcity can be reduced are that people create more resources by discoveries, people become more efficient and therefore, use fewer resources, and people realize that not everything is necessary, causing them to use resources wisely.
The methods described above are not stable; consequently, we cannot depend on them to reduce scarcity.
This is when money is essential. Money alleviates the issue of scarcity by obligating people to purchase limited things. When people have limited amounts of money to buy resources, they will seek methods to become more efficient and use fewer resources.
Scarcity can not be eliminated, but there are ways to reduce it. 3 ways that scarcity can be reduced are that people create more resources by discoveries, people become more efficient and therefore, use fewer resources, and people realize that not everything is necessary, causing them to use resources wisely.
The methods described above are not stable; consequently, we cannot depend on them to reduce scarcity.
This is when money is essential. Money alleviates the issue of scarcity by obligating people to purchase limited things. When people have limited amounts of money to buy resources, they will seek methods to become more efficient and use fewer resources.
Why does Scarcity Exist?
As discussed before, scarcity occurs due to a lack of resources, but what has not been discussed is what these resources are and how each country varies differently.
Factors of Production
Factors of production are one of the most important concepts of economics, as they play a substantial role when a country decides what goods and services to produce.
Since not every country has the same factors of production, every country produces different goods and services. As a result, people make choices differently from country to country. This happens because people are inclined to purchase products that are cheaper, and country-produced goods and services tend to be cheaper.
Furthermore, countries must also make choices here. Countries must decide how to efficiently use their factors of production to produce as much as possible with little wastage. Countries do not wish to finish all of their resources.
It is easy for one to be able to figure out which type of resource a country or business lacks because there are 4 factors of production.
Since not every country has the same factors of production, every country produces different goods and services. As a result, people make choices differently from country to country. This happens because people are inclined to purchase products that are cheaper, and country-produced goods and services tend to be cheaper.
Furthermore, countries must also make choices here. Countries must decide how to efficiently use their factors of production to produce as much as possible with little wastage. Countries do not wish to finish all of their resources.
It is easy for one to be able to figure out which type of resource a country or business lacks because there are 4 factors of production.
Natural Resources
Natural resources mainly refer to land, but also include anything that has not been altered by humans. In other words, anything that is in its natural state. For instance, trees, crude oils, and coal are natural resources.
Human Resources
Human resources is the labor/human effort that is applied in producing the goods and services. Anything that involves humans doing work is known as human resources. For example, lumberjacks, construction workers, and truck drivers are human resources.
Capital Resources
Capital resources are the tools used in labor to create the product. For example, machines, trucks, and factories are all capital resources because they are used in labor. Capital resources also include raw materials after they have been altered by humans (previously produced goods). For instance, gasoline is altered by humans, but it can still be considered a capital resource if a company uses it in the process of producing a new good/service.
A typical misconception about capital resources is whether money is capital or not. Put simply, money is only considered a capital resource if it is spent to purchase things necessary for production. For example, if a business spends $10,000 in purchasing a factory, the money would be considered capital because the factory is necessary for production.
Entrepreneurship
Entrepreneurship is the skills needed to bring all other aspects of production together. Entrepreneurship is crucial because without it, all other resources would be meaningless.
A successful entrepreneur must have 2 significant abilities: managerial ability and risk taking.
Managerial ability is the ability to organize, direct, control, and be highly motivated. The best entrepreneurs are self-motivated, allowing them to push themselves through the arduous work.
Risk taking is imperative because without risks a business will never thrive. To become successful, one must be willing to take risks. However, the risks that are taken must be well planned with implemented strategies.
Natural resources mainly refer to land, but also include anything that has not been altered by humans. In other words, anything that is in its natural state. For instance, trees, crude oils, and coal are natural resources.
Human Resources
Human resources is the labor/human effort that is applied in producing the goods and services. Anything that involves humans doing work is known as human resources. For example, lumberjacks, construction workers, and truck drivers are human resources.
Capital Resources
Capital resources are the tools used in labor to create the product. For example, machines, trucks, and factories are all capital resources because they are used in labor. Capital resources also include raw materials after they have been altered by humans (previously produced goods). For instance, gasoline is altered by humans, but it can still be considered a capital resource if a company uses it in the process of producing a new good/service.
A typical misconception about capital resources is whether money is capital or not. Put simply, money is only considered a capital resource if it is spent to purchase things necessary for production. For example, if a business spends $10,000 in purchasing a factory, the money would be considered capital because the factory is necessary for production.
Entrepreneurship
Entrepreneurship is the skills needed to bring all other aspects of production together. Entrepreneurship is crucial because without it, all other resources would be meaningless.
A successful entrepreneur must have 2 significant abilities: managerial ability and risk taking.
Managerial ability is the ability to organize, direct, control, and be highly motivated. The best entrepreneurs are self-motivated, allowing them to push themselves through the arduous work.
Risk taking is imperative because without risks a business will never thrive. To become successful, one must be willing to take risks. However, the risks that are taken must be well planned with implemented strategies.
Scarcity, albeit a problem, is crucial for economics’ existence.
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Works Cited
CK-12 Platform. “1.2 Scarcity, Choice, and Resources.” CK, 14 Nov. 2019, flexbooks.ck12.org/user:zxbpc2rzcziwmthaz21hawwuy29t/cbook/episd-2019-2020-economics-with-emphasis-on-the-free-enterprise-system/section/1.2/primary/lesson/scarcity-the-science-of-economics.