Scarcity: Study Guide (Macroeconomics 1.1)

What scarcity means

Think of everything people in a country would like to have: more food, better hospitals, faster internet, cleaner air, more free time. The list never ends. When one want is met, new ones appear.

Now think of what the country has to produce those things with: its land, its workers, its machines and buildings, and the people who organise production. These are large, but they are limited.

Key definitions:

• Scarcity: the basic problem that resources are limited while wants are unlimited. There are never enough resources to produce everything people want.
• Economic resources (also called factors of production): the inputs used to produce goods and services.
• Economics: the study of how individuals, firms and societies choose to use scarce resources to satisfy their wants.
• Trade-off: giving up some of one thing to get more of another.

Scarcity is about the relationship between wants and resources. A resource is scarce when people would like more of it than is available at no cost. A rich country has far more resources than a poor one, but its people also want more. Every economy faces scarcity. So does every person: even someone with a great deal of money has only 24 hours in a day.

Scarce goods and free goods

Most goods are scarce: making them uses resources that could have been used for something else. A few goods are free goods: there is so much of them that using more costs nobody anything. Air to breathe in most places is the usual example. If you breathe more air, nobody else has less.

Do not confuse a free good with something that has a zero price. A free school meal still uses food, cooks’ time and kitchen equipment. Someone pays for those resources, and they could have been used elsewhere. The meal is free to the student, but it is still scarce.

Economic resources: the four factors of production

Economists group economic resources into four categories.

Resource	What it is	Valdorian examples	Income it earns (background)
Land	Natural resources: everything provided by nature before people work on it	farmland, a river, a forest, oil under the ground, fish in the sea	rent
Labour	Human effort, physical and mental, used in production	a nurse’s work, a coder’s work, a farmer’s work	wages
Capital	Human-made goods used to produce other goods and services	a tractor, a factory, a delivery van, a laptop used at work	interest
Entrepreneurship	Organising the other three resources, taking the risk of loss and trying new ideas	a person who starts a bus company and risks her savings	profit

Valdoria is the fictional country used across the Marlbridge macroeconomics pages. Its currency is the valda (VD).

Notes on each resource:

• Land includes much more than ground. Minerals, water, forests and fish all count, as long as they are used in their natural state.
• Labour is the work people do, not the people themselves. The skills and knowledge that make workers more productive are called human capital. You will meet human capital again when you study economic growth.
• Capital in economics means physical capital: tools, machines, equipment and buildings that are made by people and used to produce. Money is not capital in this sense. Money cannot produce anything by itself. A firm uses money (sometimes called financial capital) to buy capital.
• Entrepreneurship is a special kind of human effort. The entrepreneur decides what to produce and how, combines land, labour and capital, and accepts the risk that the business may fail.

The income column is useful background. You will see these payments flowing from firms to households in the circular flow model (Topic 2.1). In this topic you only need to define and identify the resources.

How scarcity forces choices

Because resources are limited, using a resource for one purpose means it cannot be used for another purpose at the same time. A hectare of land used for a new factory cannot also grow rice. An hour a doctor spends on paperwork is an hour she does not spend with patients.

So scarcity forces choices, and every choice involves a trade-off:

• Individuals choose how to spend limited income and limited time.
• Firms choose what to produce and which resources to use.
• Governments choose how to spend limited tax revenue: more on health may mean less on roads.

Every society must answer three basic questions (useful background): what to produce, how to produce it, and for whom. Different economic systems answer them in different ways, but none can avoid them.

The value of the next-best alternative that you give up when you make a choice is its opportunity cost. Topic 1.2 develops this idea and shows how to measure it.

Worked example 1: classifying economic resources

Question. Mira runs a fruit-juice business in Valdoria. She left a salaried job and put VD 15,000 of her own savings into the firm. Classify each item as land, labour, capital or entrepreneurship. If an item is not an economic resource, say so.

1. The orchard soil and rainfall that grow the oranges
2. Three assistants who squeeze fruit and serve customers
3. The juicing machines and the refrigerated van
4. Mira’s decision to open the business, her plan for the menu and her acceptance that she may lose her savings
5. The VD 15,000 in the firm’s bank account
6. The shop building Mira rents in the town centre

Answer.

1. Land. Soil and rainfall are natural resources, provided by nature.
2. Labour. The assistants supply human effort. They earn wages.
3. Capital. The machines and the van are made by people and used to produce juice.
4. Entrepreneurship. Mira organises the other resources, takes the risk of loss and brings a new idea to the market.
5. Not an economic resource in itself. Money is financial capital. It lets Mira buy resources, but it produces nothing on its own.
6. Capital. A building is human-made and is used in production. Mira rents it, but that does not change what kind of resource it is: the payment she makes is for the use of a building. (In everyday speech that payment is “rent”; in the table above, “rent” means the income earned by land. Do not let the everyday word decide the category.)

Check. Ask two questions for any item. Was it made by people? If not, and it comes from nature, it is land. Is it used to produce something else? If it is human-made and used in production, it is capital. Human effort is labour, unless it is the organising and risk-taking role, which is entrepreneurship.

Watch out. Mira does some work in the shop as well. When she serves customers, that is labour. Her organising and risk-taking role is what makes her an entrepreneur. One person can supply more than one resource.

Worked example 2: a choice forced by scarcity

Question. Brenmoor is a fictional town in Valdoria. Its council has a budget of VD 900,000 for new projects this year. Residents want three projects:

Project	Cost
Clinic upgrade	VD 600,000
Road repairs	VD 450,000
School library	VD 300,000

(a) Can the council afford all three? (b) Which combinations of two projects can it afford? (c) Explain how this shows scarcity and a trade-off.

(a) Total cost = 600,000 + 450,000 + 300,000 = VD 1,350,000. The budget is VD 900,000, so the council is VD 450,000 short. It cannot fund all three.

(b) Check each pair against the VD 900,000 budget:

• Clinic + roads = 600,000 + 450,000 = VD 1,050,000. Over budget by VD 150,000. Not affordable.
• Clinic + library = 600,000 + 300,000 = VD 900,000. Exactly the budget. Affordable.
• Roads + library = 450,000 + 300,000 = VD 750,000. VD 150,000 left over. Affordable.

(c) The council’s wants (VD 1,350,000 of projects) are greater than its resources (VD 900,000). That is scarcity. It must choose. If it chooses the clinic and the library, it gives up the road repairs this year. If it chooses the roads and the library, it gives up the clinic upgrade. Whichever pair it picks, one project is given up: that is the trade-off.

Check. Suppose the budget rose by VD 450,000 (50% more), to VD 1,350,000. The council could then fund all three projects. Would scarcity end? No. Residents would soon want a new sports ground or a bigger bus fleet, and the council would face new choices. A bigger budget changes which choices are made, not whether choices must be made.

Why the money stands for resources. The budget is in valdas, but what is really scarce is the land, labour and capital the money would buy. Workers who repair roads cannot, at the same time, build a clinic.

Scarcity and shortage are different

Students often mix these up, so keep them apart.

	Scarcity	Shortage
What it is	Wants are greater than the resources available to satisfy them	Buyers want more of a good than sellers offer at the current price
Where	Every economy, every person	One particular market
How long	Permanent; it never goes away	Usually temporary
What removes it	Nothing	A change in price or in supply

A shop that sells out of umbrellas on a rainy morning has a shortage of umbrellas. Umbrellas were scarce before the rain and will still be scarce afterwards, because making them uses resources. You will see how price changes remove shortages in Topic 1.6.

Common misconceptions

• “Scarcity means something has run out.” No. That describes a shortage. Scarcity means resources are limited compared with wants, even when shops are full.
• “Rich countries do not face scarcity.” They do. Their resources are larger, but their wants are larger too. Every society must choose.
• “Money is capital.” In economics, capital means human-made tools, machines and buildings. Money buys capital but produces nothing itself.
• “Labour means the number of people.” Labour is the human effort used in production. A large population that is not working supplies no labour.
• “Land just means ground.” Land covers all natural resources: water, minerals, forests, fish.
• “A good with a price of zero is a free good.” A free school meal still uses scarce resources. A free good is one that uses no scarce resources at all, such as the air we breathe.
• “Entrepreneurship is the same as managing.” A manager may be paid a salary for organising work; that is labour. Entrepreneurship includes taking the risk of loss and trying new ideas.
• “Renewable resources are not scarce.” Fish, forests and fresh water are renewable, but at any moment there is a limited amount, and using them one way means not using them another way.

Where this leads

Scarcity is the starting point for the whole course. In Topic 1.2 you will measure what a choice gives up (opportunity cost) and draw the production possibilities curve, which shows the limits that scarce resources place on an economy’s output: Opportunity Cost and the Production Possibilities Curve.

Before that, try the practice questions, then use the revision notes and the checklist to consolidate.