Scarcity, choice and opportunity cost

So its the start of the course and you will all be encountering the concept of scarcity. It's a vital concept in Economics, but really not given anywhere near enough attention in VCE. This means when the exam asks about these early portions of the study design students have not revised it that well.

Therefore its really a good idea to get this right first time. I won't waste space repeating the textbooks, but I'd like to point you at some resources and draw a lesson from this concept.

A brief overview:

Scarcity is the issue that describes the problem that there are not enough resources to satisfy the wants of society. Therefore society has to make a choice about What to produce, how to produce it and who gets the goods and services produced.

The cost of the choices made is the opportunity cost, the next best alternative given up.

To reduce, but not eliminate, the problem of scarcity it is best for society to use its resources fully and efficiently and that means the economy operating on the boundary of the Production Possibility Curve (or PPF - Frontier). Please note that one text book states that you can distinguish between points on the PPF in terms of productive efficiency - this is wrong and in 2010 misled many candidates! All points on the PPF are efficient.

So what is the lesson?

In a word it is all about price.

Any system can be adopted to deal with scarcity. The method chosen in Australia is the market system. 

This means that each good and service has a price. If you can afford the price then you can have it.

So how does price allocate resources between alternative uses? The answer is that your income is like votes. One dollar equals one vote.

Households compete with each other for the goods and services produced because they are scarce. The more votes a good gets the higher the price it can command and as the price rises some people decide not to buy. The scarce resources of Australia are allocated to the uses which people will pay most for.

It may not be fair but it works.

So the prices we pay in the shops are due to scarcity. If there was no scarcity all goods and services would be free and Grand Final tickets would be available to all who want them. We can dream.

Here are a couple of Youtube links. One is a 15 minute lesson, very useful for revision too.

Scarcity, Opportunity Cost and the PPC - 15 mins

Scarcity and choice - 4.5 mins