Scarcity is a situation where there are not enough resources to satisfy everybody’s wants. It is when unlimited wants exceed limited resources.
This gives rise to a choice. The economy has to answer the following basic economic questions:
What to produce?
How to produce?
For whom to produce?
Needs: Needs are something which are required for the survival of the human being.
Example: Food, clothing, shelter
Wants: Wants are something which are not required for the survival but they add comfort to ones life.
Example: Luxury car, branded T shirt
Types of Goods
Economic Goods: A product which requires resources to produce it and therefore has an opportunity cost.
Example: Education, Bottled Water
Free Goods: A product which does not require any resources to make it and so does not have an opportunity cost.
Example: Air, Wind
Capital Goods: Capital goods are those goods which are required to produce other goods.
Used by: Producers
Purpose: Business
Example: Pizza Ingredients, Taxi
Consumer Goods: Consumer goods are those goods which are directly used for final consumption.
Used by: Consumers
Purpose: Consumption
Example: Pizza, Car
Durable Goods: Durable goods are the goods which last for a longer period of time. It can be used many times.
Example: Refrigerator, Washing Machine, Machinery
Perishable Goods: It cannot be stored and preserved for a longer period of time. It can be used only once.
Example: Fruits, Vegetables, Bread
Merit Goods: People underestimate the benefits of these goods. Merit goods have positive externalities.
Example: Education, Vaccination, Healthcare
Demerit Goods: People underestimate the costs of these goods. Demerit goods have negative externalities.
Example: Tobacco Products, Alcohol, Violent Games and Movies
Exemplar Questions
Define finite resource. (2 marks)
A resource is an aid to production (1) which is limited in supply (1) it cannot be replaced over time / fast enough / will run out (1) to keep pace with consumption (1).
Explain what is meant by the ‘economic problem’. (2 marks)
There are finite/limited/scarce resources (1) but unlimited/infinite wants (1) and so it is necessary for a choice to be made (1).
Explain why the economic problem can never be solved. (4 marks)
the economic problem is scarcity (1).
infinite wants (1) finite resources (1).
wants exceed resources (1) as wants grow faster than resources/growth of resources will not exceed growth of wants (1).