The Economic Problem » Scarcity: The Basic Economic Problem

What you'll learn this session

Study time: 30 minutes

Edexcel spec: 1.1.1 (a)

• What economics is about
• Why scarcity is the basic economic problem
• Why scarcity forces consumers, producers and governments to make choices
• The difference between needs and wants, and between goods and services

What is economics?

Lunch or save? Every choice like this teen's is economics, because you can't have everything you want

Every day you make choices about money, time and things. Should you buy lunch or save your pocket money? Should you play a game or revise? Economics is the study of how people, businesses and governments make choices when they cannot have everything they want.

This topic is examined on Paper 1: Microeconomics and Business Economics. It is the starting point for the whole course, so it is worth getting really clear.

Key terms:

• Economics: the study of how people, businesses and governments choose to use limited resources to meet their wants.
• Resources: the things used to make goods and services, such as workers, land, machines and raw materials.
• Wants: things people would like to have. Wants never run out.
• Needs: things people must have to survive, such as food, water, clothing and shelter.
• Goods: physical items you can touch, such as a phone, a pair of trainers or a loaf of bread.
• Services: actions done for you, such as a haircut, a bus journey or a lesson from a teacher.
• Scarcity: the economic problem that wants are unlimited but resources are finite (limited).

Needs and wants

Wants are different for each person. One person wants a guitar, another wants a bike. Economists say wants are unlimited: however much people have, they can always think of something else they would like.

Goods and services

What we want is produced as either goods or services.

• Goods are things you can pick up or touch: a football, a laptop, a sandwich.
• Services are things done for you: a doctor's check-up, a taxi ride, a film streamed to your tablet.

Businesses produce both. Governments also provide both, such as roads (a good) and policing (a service). You will see how this works later in the course.

The problem of scarcity

Farmland is finite: there is only so much of it, but our wants keep growing, which is the problem of scarcity

Here is the heart of economics. Our wants are unlimited, but the resources used to meet them are finite. Finite means there is only a limited amount. There is only so much oil, so many workers, so much farmland and so much time.

So there are never enough resources to produce everything everyone wants. This is called scarcity, and it is the basic economic problem.

Scarcity does not only mean something is rare. Even something common, like water in a dry year, is scarce if there is not enough to meet everyone's wants. Scarcity affects rich and poor countries alike. A very rich country still cannot produce everything its people want.

Scarcity forces choices

Because we cannot have everything, we must choose. Choosing one thing means we cannot have something else with the same resources. Every economic decision-maker faces this.

All three face the same issue: more they would like to do than the resources to do it. The next lesson looks at what is given up when a choice is made.

Exam-style question

Read the information, then answer the questions. This is the style of question you might see on Paper 1.

A school has a budget of £5,000. Students would like new sports equipment, a new set of computers and a trip for the whole year group. The budget does not cover all three.

(a) Define the term 'scarcity'. [2 marks]

(b) Identify one example of a service from this list: sports equipment, a school trip, computers, a football. [1 mark]

(c) Explain why the school has to make a choice. [3 marks]