Scarcity: the basic economic problem
This unit is examined on Paper 1, Microeconomics and Business Economics.
It is the starting point of the whole course, and its ideas turn up all over the paper: a multiple-choice item on opportunity cost or the production possibility curve, a 1-mark definition, a 3-mark Explain on a choice someone has made, a PPC to draw, and now and then a 9-mark Assess on why a business owner does not chase the highest profit.
Across the four most recent series it carried about one mark in every twelve on Paper 1, so it is worth learning well.
The idea: there is never enough of everything
Think about what you would like to have.
A new phone, more free time, a holiday, better trainers, a bigger room.
As soon as you have one thing, there is something else you want.
Now think about a whole country.
Its people want more hospitals, more schools, better roads, cleaner air, cheaper food and higher wages, all at once.
Economists say that wants are unlimited: people will always want more goods and services than they have.
The things used to make goods and services are limited.
There is only so much farmland, oil, water and time.
There are only so many workers, and each one has 24 hours in a day.
There are only so many machines, buildings and vehicles.
These are resources, and they are finite: there is a fixed amount of them at any moment.
Put the two together and you have the problem of scarcity.
You need to know it in these words: the problem of scarcity, where there are unlimited wants and finite resources, leading to the need to make choices.
Not every want can be met, so something has to be chosen and something left out.
The flow diagram above shows the chain.
Scarcity is not the same as "running out".
Gold is scarce, but it has not run out.
Scarcity means that, at any moment, the resources available are not enough to produce everything that people want, so something has to give.
Why scarcity forces choices
Because resources are finite, using them for one thing means they cannot be used for another.
A field planted with maize cannot grow sugar cane at the same time.
A teacher teaching a class cannot also be working as a nurse.
A government that spends its budget on a new airport cannot spend the same money on hospitals.
So every economic agent has to choose:
- Consumers choose how to spend a limited income: a new phone this month, or clothes and a cinema trip.
- Producers (firms) choose what to make with their limited workers, machines and money: more of one product means less of another.
- Governments choose how to spend limited tax revenue: health, education, defence or roads.
This is why economics exists as a subject.
If resources were unlimited, everyone could have everything, and no one would need to choose.
The rest of this unit follows the chain on from scarcity: choices lead to opportunity cost, and the production possibility curve turns the choice into a diagram.
Scarcity in a real case: Cape Town, 2018
In 2018 the city of Cape Town in South Africa came close to running its taps dry after several years of drought.
From 1 February 2018 the city limited each resident to 50 litres of water a day, down from 87 litres.
Water was a finite resource, and wants for it (drinking, washing, gardens, farms, factories, hotels) far exceeded what the dams could supply.
Every household had to choose how to use its 50 litres: a short shower, or water for cooking and washing clothes.
Farms and firms had to choose which crops to water and which processes to slow down.
The case shows scarcity at its sharpest, but the same problem is present everywhere, all the time, for every resource.
With piped water capped at 50 litres a person, many Cape Town residents queued at natural springs to fill containers by hand.
Every litre carried home had to be shared between drinking, cooking and washing.
Scarcity is relative, not absolute
A tempting mistake is to think that rich people and rich countries do not face scarcity.
They do.
A rich country still has a fixed number of workers and hours, and its people still want more than it can produce.
A billionaire still has only 24 hours a day.
Scarcity is about wants compared with resources, not about being poor.
Poverty makes scarcity harder to bear, but it does not create the problem.
- The problem of scarcity: where there are unlimited wants and finite resources (1), leading to the need to make choices (1).
- Finite resources: resources that are limited in amount at any given time (1), so they cannot produce everything that people want (1).
- Economic agents: consumers, producers and government, the groups who make economic choices.
Learn the scarcity wording exactly.
For a 2-mark What is meant by item, the two ideas are "unlimited wants and finite resources" (1) and "leading to the need to make choices" (1).
For a 1-mark Define item, one precise idea is enough.
An example, such as "there is not enough water in Cape Town", earns nothing, because examples are never credited as definitions.
A secondary school in Nairobi has 30 computers.
Its 900 students would all like to use one for at least an hour a day, but the computer room is open for only 8 hours.
Explain how this shows the problem of scarcity.
1. Name the want: the students' wants for computer time are very large: 900 students × 1 hour = 900 hours a day.
2. Name the finite resource: 30 computers × 8 hours = 240 computer-hours a day.
3. Compare: 900 hours wanted against 240 hours available, so the wants exceed the resources.
4. Link to choice: the school must choose who gets the computers and when, for example by giving priority to examination classes.
Answer: wants (900 hours a day) are greater than the finite resource (240 computer-hours), so the school has to make a choice about how to share the computers.
That choice is the economic problem in miniature.
State one finite resource used by a cocoa farm in Côte d'Ivoire.
(1)
Answer: Land (the fields where the cocoa trees grow) (1).
Other creditable answers: water, workers' time, tractors or tools.
One word or phrase is enough; no development is credited.
Describe one reason why a family with a fixed monthly income has to make choices.
(2)
1. Give the reason: the family's income is limited, a finite resource (1).
2. Develop it: so it cannot buy everything it wants, and spending more on one item, such as school fees, means spending less on something else (1).
Answer: The family's income is finite (1), so its unlimited wants cannot all be met and spending on one item leaves less for others (1).
Only one reason earns credit.
On every definition item, examiners report that many candidates give an example instead of the meaning of the term.
Write the wording itself: "unlimited wants and finite resources, leading to the need to make choices."
Then stop: no example is needed or credited.
- Scarcity means "running out". A resource can be scarce even when there is plenty of it in stock; it is scarce because wants for it exceed what exists. Use the words "unlimited wants" and "finite resources".
- Only poor countries face scarcity. Every person, firm and country faces it, because wants are always greater than the resources available.
- Leaving out the choice. The definition has two parts. Unlimited wants and finite resources is half of it; "leading to the need to make choices" is the other half, and it is a separate mark.
- Giving an example as a definition. "Water in Cape Town" shows scarcity; it does not define it.
Check your understanding
1. Which one of the following is a want, not a resource? (1)
- A A forest owned by a timber company
- B A family's wish to own a second car
- C The hours worked by a bus driver
- D A sewing machine in a clothing workshop
Total [1]
2. A student writes: "Scarcity is not a problem for the United States because it is one of the richest countries in the world."
Which one of the following explains why the student is wrong?
(1)
- A The United States has no unemployment
- B Rich countries can always import more resources
- C Rich countries have unlimited resources
- D Even rich countries have finite resources and unlimited wants
Total [1]
3. Describe one reason why a hospital in Lusaka, Zambia, has to make choices about which operations to carry out each day. (2)
Total [2]
4. In 2025 the town council of Santa Marena has $4 million left in its budget. Residents want the main road repaired, which would cost $3 million, and a new public library, which would cost $2.5 million.
Explain one reason why the council has to make a choice.
(3)
Total [3]
5. After two years of very low rainfall, the reservoirs that supply the city of Valdera hold only 40% of their normal level. The city water company has cut supplies to factories by a quarter and asked households to stop watering gardens. Hotels say they may have to turn away guests.
With reference to the data above and your knowledge of economics, analyse why the shortage of water forces households and firms in Valdera to make choices.
(6)
Total [6]
Answers
1. The only correct answer is B (1)
- A is not correct because a forest is a natural resource (land) used to produce timber.
- C is not correct because the driver's hours are labour, a resource used to provide a service.
- D is not correct because a sewing machine is capital, a man-made resource.
2. The only correct answer is D (1)
- A is not correct because unemployment is not what causes scarcity, and the United States does have unemployment.
- B is not correct because imports are paid for with resources too, and the world's resources are also finite.
- C is not correct because no country has unlimited resources.
3. The hospital has a limited number of surgeons, operating theatres and hours in the day (finite resources) (1), so it cannot carry out every operation patients want and must choose which ones to do first, for example the most urgent (1). Only one reason earns credit.
4. Identify: the council's budget is a finite resource (1). Develop: the two projects together would cost $5.5 million, more than it has, so it cannot meet every want and must choose (1). Context: with $4 million, Santa Marena can afford the road ($3 million) or the library ($2.5 million), but not both (1).
5. Indicative content (one-sided):
- Water is a finite resource: with reservoirs at 40% of their normal level, there is far less water than households, factories and hotels want, so the problem of scarcity is sharp.
- Households cannot use water for everything: with gardens banned, they must choose between uses such as cooking, washing and cleaning, so some wants go unmet.
- Factories have a quarter less water, so they must choose which products to keep making and which processes to slow down; output and revenue may fall.
- Hotels must choose how many guests to accept: each guest uses water, so turning guests away is the price of keeping enough for those who stay.
- Each of these choices means giving something up, which links scarcity to opportunity cost.
A Level 3 answer develops two or more of these into chains that use the data (the 40% level, the quarter cut, the garden ban).
A list of uses of water without linking them to limited supply stays in Level 1.
No counter-argument is needed.