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Explain how consumers and producers confront the condition of scarcity, by making choices that involve opportunity costs and trade offs.

A graph showing the average prices of gasoline in the US between 1974 and 2004
A graph showing the average prices of gasoline in the US between 1974 and 2004

Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost.

Topics on the Page
Limited Resources and Unlimited Wants
Opportunity Costs
Supply, Demand and Equilibrium
Example: Oil
Example: Water

Scarcity Sign: "There are shortages of everything except bullets"
Scarcity Sign: "There are shortages of everything except bullets"

Limited Resources and Unlimited Wants

To understand Scarcity you need to understand these two facts:
  1. Limited Resources: At any given time, the resources available to a society are limited. There is only so much oil, gold, timber, or wheat; just so much capital, just so much labor. Resources, the inputs used to make consumer and producer goods, are limited.
  2. Unlimited wants: people, individuals, families, or larger groups, have needs, wants, and desires which they would like to be satisfied, as much as they can be, by the goods and services produced by employing the society's limited resources. However, wants and desires, unlike resources, appear to be virtually unlimited. History and psychology show us that hey may never be satisfied, since satisfaction of some wants only seems to lead people to acquire new wants.

Summary: all kinds of resources are LIMITED and all wants from consumers/people are UNLIMITED.

This difference in limitations is what creates the concept of scarcity.

Resources are limited and need to be directed towards satisfying the wants of consumers that benefits BOTH the consumer and producer.

Opportunity Costs
  • Producers face a limited amount of resources (raw materials, human capital, etc), and therefore are only able to generate a limited amount of output or consumer goods.
    • Consumers must then ration their own resources to determine, essentially, how to maximize their utility. For example there is a consumers income. Do they send their limited income on essentials like food and other basic needs or buying that next generation $700 phone. They cant have both so they make their decision based on their limited resources compared to their wants, which is more important to them, food or phone.
  • This is where the concept of trade-offs comes into play, other wise known in the economic world as Opportunity Cost.
    • Consumers must establish their opportunity costs in determining which goods and services generate the most utility, given a scarce amount of resources some of which they must give up.
    • For example do you go to that concert you really want to go to or work that day for extra pay. Based on the individual some will find the concert of more value to them, others would like prefer the extra money.
    • Its that trade off that makes up opportunity cost. If your wants and desires directs your limited resources to one good or service you will miss out another good or service.

Supply, Demand and Equilibrium
  • Ultimately, scarcity determines supply, demand and equilibrium.
    • For consumers (DEMAND), scarcity determines how much of limited resources they must give up (or opportunity costs they are sacrificing) to maximize their utility. Which good should they spend their resources on, which gives them the most bang for their buck so to speak.
    • For producers (SUPPLY), scarcity determines which good and how much of that good they should produce that will maximize their profit with out flooding or shorting the market with their good.
    • EQUILIBRIUM: this is the concept that supply meets demand. There is not too little or too much of a good on the market while also not having to little or too much demand for the same good. There is just enough of both.

Multimedia.pngClick here for a short, five minute video that clearly explains scarcity in relation to consumers in economics.

Click here for a video explaining opportunity cost. (Start at time mark 20:35)
    • Author of this ^ video does great stuff on economics, highly recommend watching his other videos for further economic topics.

Screen Shot 2016-01-04 at 11.31.08 AM.pngActivity to show scarcity/lesson plan click here

Environmental Scarcity article click here

US petroleum production & imports, 1920--2005
US petroleum production & imports, 1920--2005

Example: Oil

See Special Topic Page on Oil in Central Asia

Oil exists in a limited supply in the world.

The limited amount determines the supply and opportunity cost. People must ration out the utility of the oil to maintain an equilibrium in the market.

Where Does America Get Oil? You May Be Surprised from NPR (April 12, 2012).

Example: Water

See Special Topic Page on Small Island Nations and Rising Sea Levels

Water Scarcity Threats from World Wildlife Fund

5 Ways to Teach Students About the California Drought

Case Study by the UN click here
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