Published by Patrick Mutisya · 14 days ago
Every economy, regardless of its level of development, faces the same fundamental issue: resources are limited while human wants are unlimited. This mismatch creates the basic economic problem, which forces societies to make choices about how to allocate resources.
Resources are scarce for three main reasons:
Because of scarcity, economies must answer three fundamental questions:
When a decision is made, the opportunity cost is the benefit that could have been obtained from the best alternative that was not chosen. It can be expressed mathematically as:
\$\text{Opportunity Cost} = \text{Benefit of Next Best Alternative} - \text{Benefit of Chosen Alternative}\$
In most cases the benefit of the chosen alternative is already realised, so the opportunity cost is simply the value of the foregone alternative.
| Resource Category | Examples | Reason for Scarcity | Typical Opportunity Cost |
|---|---|---|---|
| Natural Resources | Land, oil, minerals, water | Finite stock; extraction limits | Alternative land uses (e.g., agriculture vs. housing) |
| Human Resources | Labour, skills, entrepreneurship | Population size; education & health constraints | Alternative employment (e.g., manufacturing vs. services) |
| Capital Goods | Machinery, factories, technology | Investment costs; depreciation | Alternative investment projects (e.g., roads vs. schools) |
| Entrepreneurial Ability | Innovation, risk‑taking | Limited number of individuals with viable ideas | Alternative ventures (e.g., tech start‑up vs. retail) |
Scarcity is the cornerstone of economic analysis. It compels societies to make choices, which inevitably involve trade‑offs measured by opportunity cost. Understanding scarcity helps students grasp why economies must answer the three fundamental questions of what, how, and for whom to produce.