II.  SCARCITY

Scarcity, the result of unlimited human wants coming face to face with the fact of limited resources to meet those wants, is one of the basic assumptions of economics. Most economists consider scarcity the central problem of economics.  Once it is realized that resources are scarce, we see that there must be some mechanism for rationing these scarce resources among alternative uses: choices must be made. 

If a choice must be made, then there is a cost involved.  The economist's concept of cost, opportunity cost, is crucial to our understanding.  Benefits given up are really what make up costs, not the dollars that we give up. Opportunity cost is the benefits given up of the most attractive alternative (doing one thing usually excludes other possibilities). Note that costs are measured as negative benefits, benefits given up.  This way benefits and costs are always in the same units so that they can be compared.  If doing one thing, call it X, involves giving up something else, Y, that is valuable, then X has a cost and involves scarcity, even if it the scarcity of our time.

Scarcity also implies competition. Some plant biologists discuss competition by plants. It is not that plants decide that they will get involved in some sort of competitive behavior with other plants. The biologists’ idea of plant competition is that plants grow and will continue to do so if there is enough water, sun, nutrients, and space. There are other plants that are also growing. With a limited amount of these resources (sun, water, nutrients, and space), some plants will eventually compete with each other for these scarce resources. There are not enough of these resources to satisfy all plants. If these resources are not scarce for the plants, plants will grow and reproduce until the basic resources upon which they rely are scarce. Scarcity, costs, and competition are inevitable, not just for plants, but especially for humans.

People deal with the problem of scarcity through markets and political institutions. If a good is scarce, people want more of that good than producers are willing to provide for free. So a good indication that a good is scarce is if you have to pay something to get it.

Markets ration goods and resources by placing prices on goods and resources. The goods are available for those willing and able to pay the price. If there are only a few of a certain type of good or resource available, but many buyers would be willing (and able) to give up a great deal of other things, those goods would have a high price. If buyers are not willing to pay much for a particular good, even if there are many available, the price would not be so high. Prices ration resources so that we do not “run out.”

Political responses to scarcity involve setting rules that restrict how much of something a person can take, who is able to take the good and when the good is available. The political response involves setting up a system of rationing. If prices aren't used as a rationing mechanism, some other method (that is no fairer than prices) must be employed, even if it is just first-come-first served.  If we can't have all we want, we would like to have our desires realized as much as possible, given that we can't always get what we want.  We want the rationing mechanism to be as efficient as possible in allocating resources to various uses that fulfill human desires.  We have begun a study of how the price system works and how efficiently it works.

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