The economic problem

Discuss using examples why the problem of scarcity is central to the understanding of economics, Is it possible to solve the economic problem? Introduction Most resources in the world are scarce this means there is a limited amount. There is a limited amount of land, labour, capital and enterprise. This is a problem because people are naturally greedy. A person’s wants are definitely not scarce they are unlimited. These two facts pose a problem, there is not enough stuff to fulfil all the peoples wants on the planet.

Through this problem the process of economics arises. There must be choices made about what is the best way to use these scarce resources to satisfy the wants of people. In this essay I will discuss, using examples why exactly the problem of scarcity is central to the understanding of economics. Also whether it is possible to solve the economic problem. Hundreds of thousands of years ago the people who populated the earth did not need any form of currency to assist their daily lives.

The cave that they lived in was free, the animals that they ate were free and the water that they drank was free. These were all free goods. There were enough of these resources to fulfil all the wants of the people. Why would a person be selling fruit if everybody could just obtain it themselves for free? But as the populations in certain societies expanded rapidly the relative amounts of goods available were diminishing. People would have to compete for the goods. Therefore the goods were scarce. The dilemma was labelled the ‘economic problem.

‘ Everybody is faced with the problem of scarcity. People, businesses and governments are all daily put in the position where they have to make economic decisions. Each person will have to make the choice over which is the best way to spend the little money they have. Should they the children a cracking Christmas and then take them to Florida in the summer or should they pay their income tax bill? Large businesses have to make big economic decisions regarding the scarcity of the resources available to them everyday as well, e. g. give the men at the top another pay rise or invest in safer ways of ridding themselves of factory waste.

Government has to make even bigger decisions than both businesses and the individual, for example, due to the scarce resources available to them they have to decide whether to improve the welfare system or to fund state visits. All resources that are scarce are called economic goods. Economics is the science of allocating the scarce resources to satisfy peoples unlimited want.

This science would be impossible to understand if the person in question did not have a grasp of the problem of there not being enough goods and services to go around. For example, a few months ago I was asked the following question. ‘ Why doesn’t the government solve all the hunger in Ethiopia by just printing loads of money then give it to the poor people so they can buy themselves food? ‘ At first hearing this suggestion I thought it was a brilliant solution to this ancient problem.

After some careful thinking I realised my initial judgement was not entirely correct. We had failed to fully understand the economics because we had not taken into account the problem of scarcity. The answer to this question is the people of Ethiopia are not hungry because they are poor it is because there is extremely scarce amounts of resources available. There isn’t enough food to go around regardless of how much money they have. If each starving Ethiopian was given 1000 Ethiopian shillings to buy food with they would not be relieved of there hunger at all.

The people would be bidding against each other for what little food there was forcing the prices through the roof. Once again nobody would be able to afford food. Below is a number of economic models illustrating this point. This diagram shows that the quantity of food being demanded by the Ethiopian people is quite low therefore the price of food is also low. This diagram shows that as the people are given money to spend on food the demand shoots up the supply curve forcing the price to a much higher level than what it was at previously.

This would have been a very poor economic decision due to them not taking into account the problem of scarcity. Economics is the study of this allocation of resources and the choices by each of the decision-makers. The best choices made are those that are going to yield the most amount of benefits from allocating the scarce resources. It would be impossible to understand any of the macroeconomic processors or decisions involving the country without being aware of the problem of scarcity.