Page 8 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 1: Basic Concepts of Economics

Notes

Note Scarcity and Choice

Scarcity occurs because people want more than what is available. Scarcity limits us both as
individuals and as a society. As individuals, limited income (and time and ability) keeps
us from doing and having all that we might like. As a society, limited resources (such
as manpower, machinery, and natural resources) fi xes a maximum amount of goods and
services that can be produced.
Scarcity requires choice. People must choose which of their desires they will satisfy and
which they will leave unsatisfied. When we, either as individuals or as a society, choose

more of something, scarcity forces us to take less of something else. Economics is sometimes
called the study of scarcity because economic activity would not exist if scarcity did not
force people to make choices.
When there is scarcity and choice, there are costs. The cost of any choice is the option or
options that a person gives up. For example, if you gave up the option of playing a computer
game to read this text, the cost of reading this text is the enjoyment you would have received
playing the game. Most of economics is based on the simple idea that people make choices
by comparing the benefits of option A with the benefits of option B (and all other options

that are available) and choosing the one with the highest benefit. Alternatively, one can

view the cost of choosing option A as the sacrifice involved in rejecting option B, and then

say that one chooses option A when the benefits of A outweigh the costs of choosing A

(which are the benefits one loses when one rejects option B).

The widespread use of definitions emphasizing choice and scarcity shows that economists

believe that these definitions focus on a central and basic part of the subject. This emphasis
on choice represents a relatively recent insight into what economics is all about; the notion

of choice is not stressed in older definitions of economics. Sometimes, this insight yields

rather clever definitions, as in James Buchanan’s observation that an economist is one
who disagrees with the statement that whatever is worth doing is worth doing well. What
Buchanan is noting is that time is scarce because it is limited and there are many things one
can do with one’s time. If one wants to do all things well, one must devote considerable
time to each, and thus must sacrifice other things one could do. Sometimes, it is wise to

choose to do some things poorly so that one has more time for other things.
1.2 Scope of Economics
Economics is concerned with the application of economic concepts and analysis to the problem of
formulating rational individual and national decisions. There are four groups of problem in both
decision making and forward planning.

1. Resource allocation: Scarce resources have to be used with utmost efficiency to get optimal
results. These include production planning, problem of transportation, etc.
2. Inventory and queuing problem: Inventory problems involve decisions about holding of

optimal levels of stocks of raw materials and finished goods over a period. These decisions
are taken by considering demand and supply conditions. Queuing problems involve
decisions about installation of additional machines or hiring of extra labour in order to
balance the business lost by not undertaking these activities.

3. Pricing problems: Fixing prices for the products of the firm is an important part of the
decision making process. Pricing problems involve decisions regarding various methods
of pricing to be adopted.

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