Economics is a large and multi-faceted discipline with different meanings according to different schools of thought. Parts of economics are rooted in philosophy, and the field borrows ideas from many other faculties, such as mathematics, social sciences, and even psychology.
Economics studies how humans make decisions in the face of scarcity. As we said before, there are several schools of thought, but they all agree upon the scarcity principle. Scarcity essentially means that people have unlimited wants. but there is only so much to go around, so there needs to be an efficient way to organize resources so people can maintain a decent standard of living. And because there is scarcity, people are often left with choices they must make between alternatives. Before we delve deep into choosing alternatives, let’s explore the scarcity principle in depth a bit more:
Imagine a rapidly growing urban city that has become a hub for manufacturing and technology companies offering ample employment opportunities, quality education, and many exciting amenities. However, the number of housing units available is limited, and housing is not keeping pace with the large group of people migrating to the city.
In this example, housing is scarce because the number of housing units (apartments, condos, houses, etc.) is limited and not growing with the level of demand. However, people still want to remain in the city and begin making choices and trade-offs. People with higher incomes are willing to pay more for housing, while less affluent people rent smaller apartments, live farther away and commute to work, or live with relatives to offset mortgage or rent payments. Every time a person makes a decision, they sacrifice what they could have received in exchange for an alternative. This is known as opportunity cost. Opportunity cost occurs when a person makes one choice but forgoes the other. If a family in this city chooses to live in a smaller house, they miss out on the benefits they could have enjoyed by purchasing a larger home. However, they may not be able to enjoy a larger home, but they will benefit because they have to spend less on the smaller house.
Scarcity forces people to make trade-offs and prioritize the things they value most. While some people have more resources in an economy than others, it’s also the reality that every person in an economy must choose how to spend their resources among contending uses regardless of how much they have. If a person is not careful in allocating their resources wisely, they risk losing most, if not all, of what they have.
