1.1 Scarcity

4 min read•june 18, 2024

Jeanne Stansak

Isabela Padilha

AP Macroeconomics 💶

99 resources

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Scarcity is the basic problem in economics in which society does not have enough resources to produce whatever everyone needs and wants. Basically, it is unlimited wants and needs vs. limited resources. Scarcity is faced by all societies and economic systems. 🌏 Since we are faced with scarcity, we must make choices about how to allocate and use scarce resources.

Economics is the study of how individuals, firms, and governments deal with scarcity. As a result of facing scarcity, all members of a society have to make choices in an effort to manage our resources in the most efficient way possible. The choices we make are known as trade-offs.

(Note: For a good to be scarce it must be both limited and desirable)

Microeconomics vs. Macroeconomics

Microeconomics is the study of how individuals 👥, households 🏠, and firms 🏭 make decisions and allocate resources. For example, whether a high school graduate chooses to go to college or directly into the workforce is a microeconomic decision.

Macroeconomics is the branch of economics that studies the behavior and performance of the entire economy instead of just the smaller economic actors. Macroeconomics deals with issues such as unemployment.

Factors of Production

Economists are trying to figure out, within an economy, the following questions: What to produce? How to produce? For whom to produce?

To produce in an economy it is required to recognize the limited supply of the 4 production factors:

Land—natural resources and raw materials used to make products. Ex: water, vegetation, oil, minerals, and animals 🏝️

Labor—the skills and abilities that individuals devote to a task for which they get paid 👷

Capital—these types of resources can be divided into two types, physical capital and human capital.

Entrepreneurship—the ability of an individual to coordinate the other categories of resources to invent or produce a good or service. Ex: Bill Gates, Steve Jobs, and Henry Ford 🚗

(Remember: Physical capital consists of inanimate resources such as money, property, and inventories. Human capital consists of human skills and knowledge, which is more difficult to measure, but still considered very important in the economic system)

Organization of Society

In order to decide what to produce and how, different societies have organized themselves based on these factors:

Tradition - Tied to the evolution of economics, and it is related to subsistence and tribal life. 📜
Command - Consists of the central planning of the economy which differed in different regions of the world depending on the political regime. 🫅
Market - Essentially, it is the place in the economy where buyers and sellers perform transactions. The modern market was built from the foundation of the Laissez Faire ("free market") philosophy introduced in 19th century, which emphasizes the importance of property rights and private property.
Mixed- Most countries today will display a mix of command and market structure. This is important because the government does play a role in organizing the economy, though to different degrees across the globe.

Opportunity Costs and Trade-offs

Trade-offs—each of the alternative choices that you gave up when making a decision. For example, you walk into the cafeteria for lunch at school and you have the option of pizza, a cheeseburger, or chicken sandwich for lunch. If you choose to have pizza, then the cheeseburger and chicken sandwich are your trade-offs🍕

Opportunity Cost—this is the value of the next best alternative when making a choice. Going back to the example of what to have for lunch, if you choose pizza, but get to the front of the line and the last slice of pizza was taken by the kid in front of you, you choose a cheeseburger instead. The cheeseburger is your opportunity cost because it is the next best alternative if your first choice is unavailable 🍔

The table below shows two possible combinations of trucks and cars that can be produced given a set amount of resources. A company or country can move between the two possibilities to best meet their needs. When they move from combo A to combo B, they give up 6 million trucks. That is their opportunity cost for this decision. If they were producing at combo B and moved to combo A, they would give up 8 million cars (opportunity cost).

Production Possibilities