Everything usable can be considered resources. Common examples are oil, coal and precious metals. When these materials become scarce, the ability of businesses to meet production goals can be affected adversely.
In some cases, even time can be considered a resource. Consequently, time is subject to the rules of scarcity as well. To illustrate, most people have only eight or nine hours per day to perform their duties at work.
If you have to go on a personal errand, you are taking away from the hours that should be allotted to work. You could, therefore, end up with a scarcity of time to do the duties that are expected of you by your employers. Related: Your Guide to Careers in Finance. Scarcity helps people make more informed choices about how to use available resources. The concept of scarcity works in business in the following ways:.
A fundamental aspect of scarcity is the mismatch between supply and demand. It is the scarcity of goods that requires economists to study the effective allocation of resources, as well as assess opportunity cost and risk reduction. When faced with the scarcity of a particular product or resource, manufacturers have to make adjustments to ensure continued profitability.
They may switch to alternative packaging materials, for example, or substitute certain ingredients in their products. High demand for certain products often results in their scarcity over time. Companies that want to keep providing their customers with these products may decide to release a limited run or increase production to meet the demand.
Employment opportunities and labor can also be considered finite resources. Depending on the circumstances of a specific job market, job openings or qualified personnel may be scarce.
Job seekers may choose to target certain positions where qualified personnel is scarce. Conversely, they may also relocate to another city or country if employment opportunities are scarce in their chosen field. If you choose to make one bottle of water, you have chosen to not make a bottle of soda. Your scarce resources force you to make a choice and a trade-off producing one product or another. Tradeoffs : Since resources are scarce for a drink manufacturer, it must make a tradeoff between producing bottles of water and bottles of soda.
Like producers, consumers also have to make choices. The concept of trade-offs due to scarcity is formalized by the concept of opportunity cost. The opportunity cost of a choice is the value of the best alternative forgone. In other words, if you can only produce bottles of soda and water, the opportunity cost of producing a bottle of water is the value of producing a bottle of soda.
Similarly, there is an opportunity cost in everything: the opportunity cost of you reading this is what you could be doing with your time instead say, watching a movie. When scarce resources are used and just about everything is a scarce resource , people and firms are forced to make choices that have an opportunity cost. When individuals make decisions, they are necessarily deciding between taking one course of action over another. In doing so, they are choosing both what to do and, by extension, what not to do.
The value of the next best choice forgone is called the opportunity cost. In other words, the opportunity cost of a course of action is the value the of the option that the individual chose not to take. Individuals face opportunity costs in both economic and non-economic decisions. By choosing to study, the student is implicitly choosing to not go to a party, hang out with friends, or catch up on some much-needed sleep.
In this example, the opportunity cost is not easily expressed in dollars and cents, but is just as real. Opportunity Cost : By choosing to go to spend time and money on things like classes and computers, you are necessarily choosing not to spend it on something else, like going on vacation. This is an opportunity cost. Rational individuals will try to minimize their opportunity costs.
By doing so, individuals are maximizing the amount that they can get out of their resources time, money, effort, etc.
This makes sense: individuals should seek to get the most and give up the least. As economic actors, individuals face opportunity costs as well. For example, suppose you decide to purchase a new computer. You could have chosen to spend your money on books or rent or a spring break trip; whichever one of those options is most valuable to you beside purchasing a new computer is the opportunity cost. Such logic applies for every economic decision: purchasing one good means that an individual has chosen to spend resources one way instead of another.
Opportunity costs are an important consideration for economists and business people, but are faced by individuals even when they are not making classically economic decisions. For example, in the US farmers use tractors to plow their fields, whereas in the country of Kenya in East Africa most field are plowed by hand. It could be argued that both farmers ARE being productively efficient. In Kenya, tractors, fuel, repairs, etc. Why don't US farmers use "modern" technology and plow their fields with helicopters and laser beams sort of like the Jetsons?
The answer is easy, it would be too costly. There are cheaper, and more productively efficient, ways to get the job done. The second way to use our existing resources to maximize society's satisfaction is allocative efficiency.
It would be a waste of our limited resources to produce a lot of things that we don't want and few of the things that we do want.
It would be a waste of our limited supply of steel to produce billions of horseshoes that nobody wants and only a few cars that people do want. This would be allocatively inefficient. People want more gasoline and very little kerosene. Therefore to use our resources wisely, we should use our crude oil to produce more gasoline and less kerosene.
As consumer tastes have moved away from small cars to large Sport Utility Vehicles, an allocatively efficient society would use its resources to produce more SUVs and fewer small cars. This results in surpluses and shortages. Whenever we produce too much surplus or too little shortage we are allocatively inefficient. We are NOT using our resources in a way that would achieve the maximum satisfaction possible. US and European farmers used to produce mountains of grain that they couldn't sell.
Pizza Hut doesn't produce piles of pizza that they cannot sell. Homebuilders do not build hundreds of homes that they cannot sell. Why did US grow more grain than they knew they could sell? The answer is - the government. The US government would buy the surplus grain form the farmers. This encouraged them to plant even more. The allocative inefficiency here is not the mountains of grain that nobody wants, but rather the loss of the resources farmers used to grow that grain.
Labor, land, energy, chemicals, machinery, etc. This is allocative inefficiency and it reduces the satisfaction that society receives from its resources.
NOTE: changes in government policy have reduced the amount of excess grain being produced. Prior to when communism in Eastern Europe collapsed, Poland and other countries had severe shortages of consumer products resulting in long lines queues.
This is a good example of allocative inefficiency. Severe shortages reduces society's satisfaction. There is a shortage of Super Bowl tickets. Hundreds of thousands of fans want to attend the game but only about 80, seats are available. This is allocative inefficiency. Build a bigger stadium? Play a 2 out of 3 or 4 out of 7 series? OR - why not simply raise the price? At this low price, hundreds of thousands of people want to go.
If they raise the price, there will be no shortage. This results in allocative inefficiency and less satisfaction for society. Let's try another example to illustrate the importance of getting the price right to achieve allocative efficiency. After hurricane Hugo struck Florida a few years ago the price of plywood, water, hotel rooms, and many other things increased dramatically.
Were these price increases BAD for the people living in Florida? This may seem controversial to many of you, but let me explain and I think you will agree with me. After Hurricane Hugo, the people of Florida did not have all the plywood that they wanted, or needed. To help them we would want two things to occur: 1 more plywood should be shipped to Florida, and 2 the people of Florida should try to conserve the plywood that they do have.
This is good for the people in Florida. Well, people standing in line to buy plywood to fix their walls, their decks, and their doghouses, will buy less and maybe decide to only fix their walls now, i. ALSO, maybe somebody sitting in the back of their pickup truck drinking beer on a Friday night in Chicago will hear a news report on the high price of plywood in Florida.
Trucks full of plywood would be heading for Florida from all parts of the country. Now, let's say that the government of Florida wants to "help" its citizens by preventing this "price-gouging" - higher prices after a natural disaster.
So they pass a law making price-gouging illegal. See links below. Does this Law help the people in Florida who need plywood? First, if the people in all those pickup trucks full of plywood hear of this anti-price-gouging law, they will turn right around and drive home.
This is bad for the people of Florida. This is good. Do you agree? Oftentimes students say, "what about the poor people who can't afford the higher prices?
NO, because there will be a shortage. There are better ways to help the poor. This is especially true if we can agree that the laws keeping the prices down actually hurt the poor by creating a shortage. The government could give the poor money, or haul in more plywood - but a law that keeps prices low hurts all.
What if a government keeps food prices too low? What do you call a shortage of food? Millions of people have been killed by governments that have lowered food prices creating a famine. The purpose of keeping food prices low was to help the poor and the hungry.
The effects of keeping food prices low is famine. Two things happen when governments lower food prices: 1 farmers make less so they work less and grow less, and 2 since prices are low those who do find food buy more.
Scarcity involves making choices. Scarcity means individuals, businesses and governments have to deal with the problem of unlimited wants, but limited resources. Every economic system, from capitalism to socialism, has to deal with the problem of scarcity whereby the demand is greater than the supply.
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