Why Is the Problem of Scarcity Important in Economics?

Scarcity--of money and other resources--is a central fact of economics.

Scarcity is a central fact of life. People have unlimited wants--for food, money, comfort, leisure time--but the resources for satisfying these and other wants are limited. Unlimited wants and limited resources mean decisions must be made about using resources to attain as many wants and needs as possible. In other words, people must economize. The field of economics examines how societies deal with scarcity.

Identification

In an economic context, scarcity means that resources do not exist in unlimited quantities. Resources such as land, labor and capital--the three main factors of production in economics--are limited and therefore scarce. Societies cannot produce unlimited amounts of food, for example, because any country has only a finite amount of land suitable for crop production.

Significance

Many of the basic principles of economics recognize the fact of scarcity. These principles, for example, state that people face trade-offs and that to get something, they must give up something else. If you want to earn more money, you must work longer and harder, which means less leisure time. If you want to drive a nicer car, you must spend more money. Spending more for a car may mean less money for the vacation you were planning. Scarcity, in short, is central to economics. Many economics textbooks, including that by Harvard economist Greg Mankiw, incorporate scarcity into the definition of economics.

Prevention/Solution

Because land, labor, capital and other resources are limited, individuals, firms and whole societies must make choices about how to deploy these resources to meet their needs. Families must decide how much to spend for housing, food and child care. They must decide who will be the primary earner and who will raise the children. Governments face scarcity as well. A nation's annual budget reflects numerous decisions about how to allocate the society's resources to meet societal needs and wants.

Expert Insight

Thomas Sowell, a syndicated columnist and economist at the Hoover Institution at Stanford University, once quipped: "The central fact of economics is scarcity. There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."

Considerations

If people had unlimited quantities of everything they wanted--food, shelter, clothing, money and more--there would be no need for them to prioritize or trade one thing to get something else. In short, if there was no scarcity, there would be no need to economize; hence, the field of economics would not exist.

References

• "Principles of Economics" (3rd ed.); N. Gregory Mankiw; 2003
• Think Exist: Quotation--The first lesson of economics

Resources

• Investopedia: Scarcity and Economics