Scarcity: Study Guide (Microeconomics 1.1)

The basic problem: scarcity

Think about everything people in your town would like: more homes, better hospitals, faster internet, cleaner rivers, new phones, longer holidays. Now think about what the town actually has to make those things: a fixed amount of land, a certain number of workers, some machines and buildings, and a limited number of hours in each day.

The wants are far larger than the means. Economists call this gap scarcity.

Scarcity is the situation in which the resources available are not enough to satisfy all of society’s wants and needs.

Because of scarcity, individuals, firms and governments must choose. Using a resource for one purpose means it cannot be used for another at the same time. That is why economics is often described as the study of how people make choices when resources are scarce.

Two points matter from the start:

• Scarcity is relative. A resource is scarce because there is not enough of it compared with what people want from it, not because there is very little of it.
• Scarcity is universal. It affects rich and poor people, rich and poor countries, and you. Even a very wealthy person has only 24 hours in a day.

Resources: the factors of production

The things used to produce goods and services are called resources, or factors of production. Economists group them into four types.

Factor	What it means	Examples
Land	All natural resources, as they are found in nature	farmland, forests, rivers, fish in the sea, oil and minerals underground
Labour	Human effort, physical and mental, used in production	a nurse’s work, a driver’s hours, a programmer’s skill
Capital	Goods made by people and used to make other goods and services	machines, tools, factories, delivery vans, computers, roads
Entrepreneurship	Organising the other factors, taking risks and making decisions about production	the founder who starts a firm, chooses what to make and risks losing money

Three details often cost marks:

1. Capital is not money. In this course, capital means physical tools, machines and buildings. Money in a bank account is not a factor of production; it is a way of buying factors. (A firm might borrow money to buy capital, but the machine is the capital.)
2. “Land” is wider than the ground. It includes every natural resource: water, minerals, wild fish, sunshine for crops.
3. The quality of labour matters. Workers with more training and education are more productive. Their skills are part of the labour resource.

Why most resources are scarce

Scarcity has two sides, and you need both to explain it.

Side 1: resources are limited.

• Each factor exists in a limited quantity at any moment. There is only so much farmland, only so many trained nurses, only so many machines.
• Time is limited. A worker who spends an hour on one task cannot spend that hour on another.
• Resources have alternative uses. A field can grow rice or hold houses; an engineer can design bridges or phones. Because each resource could be used in several ways, using it in one way always leaves another use undone.

Side 2: wants keep growing.

• People’s wants are, in practice, unlimited. When one want is met, new ones appear: a family that gets a car soon wants a better car, or a holiday.
• Populations grow, and new products create new wants.

Put the two sides together and you get scarcity, and from scarcity come choices and trade-offs.

Scarcity, choices and trade-offs

Because resources are scarce, every use of them is a trade-off: to get more of one thing, you accept less of something else.

• A government that spends more of its budget on hospitals has less for schools or roads.
• A farmer who plants maize on a field cannot plant beans there in the same season.
• You, spending an evening revising, cannot spend the same evening at a concert.

The value of the next best alternative you give up when you make a choice is called the opportunity cost of that choice. If your choices tonight were revising, a concert or sleeping early, and the concert was your second favourite, the opportunity cost of revising is the concert. It is not the concert plus the early night: you could only have done one of them instead.

You will use opportunity cost throughout the course. Topic 1.3 measures it on a production possibilities curve, and Topic 1.5 uses it to weigh the costs and benefits of decisions. For now, hold on to the chain in Figure 1: scarcity → choice → trade-off → opportunity cost.

Not every resource is scarce: non-rival knowledge

Most factors of production are rival: when one person uses a unit, nobody else can use that same unit at the same time. If one farm is using a tractor today, another farm cannot use that tractor today. If a nurse is with one patient, she is not with another.

Some resources are different. The course also counts established knowledge as a factor of production, alongside the four types above. Established knowledge, such as a well-known method, a mathematical rule or a recipe that everyone can read, is non-rival. One person using it does not reduce how much is left for anyone else. A thousand farmers can use the same crop-rotation rule at the same moment, and the rule is still all there for the next farmer.

Because using non-rival knowledge does not use it up, it may not be scarce: there is no need to choose who gets to use it.

Be careful with two things:

• Using knowledge still needs scarce resources. The crop-rotation rule is free to use, but farmers still need land, seeds, tractors and their own time. Learning a method also takes time, which is scarce.
• New knowledge is costly to create. Researchers’ time and laboratory equipment are scarce. The point is that once the knowledge exists and is known, sharing it with one more user costs nothing from the original.

(Whether people can be stopped from using something is a separate idea, called excludability. You will meet rival and excludable goods together in Topic 6.3, Public and Private Goods.)

Scarcity is not a shortage

Students often mix up these two words. Use the table to keep them apart.

	Scarcity	Shortage
Meaning	Resources are not enough for all wants	In one market, buyers want more than sellers offer at the current price
How widespread	Affects almost every resource and every economy	Affects particular goods at particular times
How long	Permanent: it never goes away	Temporary: it can end, for example when the price rises or supply increases
Example	There is never enough land, labour or time for everything people want	Tickets for one popular concert sell out in minutes

A good can be scarce without being in shortage. Bread is scarce (it takes scarce flour, labour and ovens to make), but on most days you can buy as much as you want at the shop price. You will study shortages properly with supply and demand in Unit 2.

Worked example 1: classifying the resources of a juice company

Question. Pellara Juice is a fictional company. It uses the resources listed below. (a) Classify each as land, labour, capital, entrepreneurship or established knowledge, or say that it is not a factor of production. (b) For two of the resources, explain why they are scarce. (c) Which resource may not be scarce? Explain why.

1. Orange groves on a hillside
2. River water pumped to the trees
3. Fruit pickers
4. Juice presses and a bottling machine
5. Delivery vans
6. Loan money in the company’s bank account
7. Pellara’s founder, who decided to launch a new mango juice and put her savings at risk
8. A long-known method of heating juice to kill harmful microbes, used by juice makers everywhere

(a)

Resource	Factor	Reason
1. Orange groves	Land	natural resource: the hillside and its soil
2. River water	Land	a natural resource as found in nature
3. Fruit pickers	Labour	human effort
4. Presses and bottling machine	Capital	made by people, used to produce juice
5. Delivery vans	Capital	made by people, used to deliver the product
6. Loan money	Not a factor	money buys factors; it does not produce juice itself
7. The founder	Entrepreneurship	organises the other factors, makes decisions and bears risk
8. Heating method	Established knowledge	a known method used in production, not a physical resource

(b) Any two, for example:

• The groves are scarce because the hillside is limited in size and has other uses: it could hold houses or a different crop. Using it for oranges means giving those uses up.
• The pickers’ time is scarce because each picker works a limited number of hours. An hour spent picking oranges is an hour not spent packing bottles or working for another firm.
• The vans are scarce because Pellara owns only a few; a van delivering to one shop cannot deliver to another shop at the same time.

(c) The heating method (8) may not be scarce. It is non-rival: Pellara using it does not stop any other juice maker from using it at the same moment, and it does not wear out with use. Pellara does not have to give up any other use of the method to use it.

Check. Every physical resource (1 to 5) is rival and limited, so it is scarce. The only item that is not a factor (6) is money, and the only one that may not be scarce (8) is knowledge.

Worked example 2: scarcity and trade-offs in a town council

Question. Tallon Vale is a fictional town. Its maintenance crew can work 900 worker-hours per month. Fixing a pothole takes 3 worker-hours; clearing a blocked drain takes 5 worker-hours. This month residents report 200 potholes and 150 blocked drains. (a) Show that the crew faces scarcity. (b) If the council fixes every pothole first, how many drains can it clear? (c) What is the opportunity cost of fixing one more pothole, measured in drains? And of clearing one more drain, measured in potholes? (d) A councillor says, “Hire enough extra crew to do everything and the scarcity problem is solved.” Comment.

(a)

1. Hours needed for potholes = 200 × 3 = 600.
2. Hours needed for drains = 150 × 5 = 750.
3. Total hours wanted = 600 + 750 = 1,350.
4. Hours available = 900. The wants exceed the resource by 1,350 − 900 = 450 worker-hours.

The crew cannot meet every request, so it must choose. That is scarcity.

(b) Potholes use 600 hours, leaving 900 − 600 = 300 hours. Drains cleared = 300 ÷ 5 = 60 drains. So 150 − 60 = 90 drains stay blocked this month.

(c) Every worker-hour can go to potholes or drains, so:

• One more pothole uses 3 hours that could have cleared 3 ÷ 5 = 0.6 of a drain. The opportunity cost of one pothole is 0.6 drains.
• One more drain uses 5 hours that could have fixed 5 ÷ 3 ≈ 1.67 potholes. The opportunity cost of one drain is about 1.67 potholes.

For example, fixing 10 extra potholes means 10 × 0.6 = 6 fewer drains cleared.

(d) The councillor is partly right about this list: 450 more worker-hours would cover every pothole and drain this month. But scarcity is not solved. The extra workers and their wages must come from somewhere: those workers could have worked in schools or clinics, and the money could have paid for other services. The trade-off has moved, not disappeared. And next month residents will want more: new roads, parks, street lights.

Interpretation. Scarcity is about wants relative to resources. Adding resources can meet one set of wants, but wants keep growing and the new resources have other uses, so choices are still needed.

Common misconceptions

• “Scarcity means something is rare.” A resource is scarce if there is not enough of it for everything people want from it. Farmland can cover huge areas and still be scarce.
• “Rich people and rich countries do not face scarcity.” They have more resources, but wants still exceed them, and everyone’s time is limited.
• “Scarcity and shortage are the same.” Scarcity is permanent and universal; a shortage is a temporary market gap that can end.
• “Capital means money.” In economics, capital means tools, machines and buildings used to produce. Money only buys them.
• “Land just means the ground.” Land includes all natural resources: water, forests, fish, minerals.
• “If something is free to use, it is not scarce.” A public park may be free to enter but is still scarce: its land has other uses and it can become crowded. Only non-rival resources, like established knowledge, may avoid scarcity.
• “Knowledge is never scarce.” Established knowledge, once known, is non-rival. Creating new knowledge, and the time needed to learn it, use scarce resources.
• “Opportunity cost is everything I gave up.” It is only the next best alternative, because you could have chosen just one of the others.

Where this leads

Scarcity is the starting point for the whole course. Next, Topic 1.2 asks how a society decides what to produce, how to produce it and who gets it, and how different economic systems answer those questions: read the Topic 1.2 study guide. Topic 1.3 then draws scarcity and trade-offs on a graph, the production possibilities curve.

Test yourself now with the practice questions, then use the revision notes and the checklist to consolidate.