The Economic Problem-Scarcity and Choice.[1]
Economy is derived from two Greek words which mean house and distribute. Economy was studied to understand the management of a household that later started being used to manage resources.
The chart shows the basic problem of the economy.
The basic problem of an economy deals with a man’s unlimited needs and wants and scarce resources. The resources include the production factors: land, labour, capital and entrepreneurship.
The factors of production.
Economics is the social science that studies how people use their scarce resources to satisfy unlimited needs and wants. From a teenager to a homemaker and then to a businessman, all face the same issue of how to spend their income to attain maximum satisfaction.
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Scarcity.
The purpose of production is to satisfy one’s ‘want’, but as the resources are limited, not enough output is available to fulfil every man’s wants. This explains that human wants are unlimited and are not fulfilled by limited resources, as stated by the Law of scarcity.
This chart shows how the Law of scarcity arises.
The demand is high compared to the supply, and satisfaction is not achieved due to insufficient resources. To overcome this, the choice is made available to man to allocate their resources to achieve maximum satisfaction.
For instance, if a man walks into a grocery store with ₹500, he would buy products in a way that when he walks out, the products with him would equal the value of ₹500. He might want food grains, toiletries, milk, cooking essentials, etc. but would allocate the money available to him so that he attains maximum satisfaction from his purchase.
Choices.
Scarcity gives rise to the economic problem of choice. With limited resources, the choice is given to decide what one wishes to get by sacrificing one of its demands. When the choice is made, there is sacrifice involved in it. The decision to consume a product also means not consuming another. One product can only be consumed by giving up something in exchange. Opportunity Cost refers to the cost of sacrifice that is done to choose the next best alternative.
[1] https://studiousguy.com/the-economic-problem-scarcity-and-choice/
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