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).
Explain how the existence of the economic problem forces consumers to make choices. (4 marks)
The economic problem is that resources are limited while wants are unlimited, so not every want can be satisfied. For consumers, this means limited income cannot buy everything they want, forcing them to choose which goods and services to buy and which to give up — the goods not bought represent the opportunity cost of the goods chosen.
Explain, using examples, the difference between a merit good and a public good. (4 marks)
A merit good is one that is more beneficial to consumers than they realise, so it would be under-consumed if left entirely to the market, e.g. education, where people may undervalue its long-term benefits. A public good is one that is non-excludable and non-rival, so private firms have no incentive to supply it at all because of the free-rider problem, e.g. street lighting, which benefits everyone whether they pay for it or not. The key difference is that a merit good is under-provided by the market, while a public good would not be provided at all.