Every society faces the same central difficulty: people want far more than the world can give them. This subtopic explains that difficulty by looking at finite resources, unlimited wants, the choices that must follow, and the difference between economic goods and free goods. Understanding this is essential because almost every later topic in economics, from prices to government policy, is built on the idea of scarcity and choice.
Finite Resources and Infinite Wants
Resources are finite. This means they exist in limited amounts at any particular moment. The resources used to make goods and services are called the factors of production: land, labour, capital and enterprise. A country has only so much farmland, only so many workers, only so many machines and factories, and only a limited number of people willing to take business risks. Once a resource is used for one purpose, it is no longer available for another.
Wants are infinite. Human desires are unlimited and never fully satisfied. When one want is met, new wants appear. A student who finally buys a phone may then want headphones, then a better data package, then a laptop. Wants also change as incomes rise, as new products appear and as tastes shift. Because wants keep growing while resources stay limited, scarcity exists.
Scarcity describes a situation where wants are greater than the resources available to satisfy them. It is a relative idea, not a statement about small quantities. Water may be scarce in a dry region but plentiful beside a river. Scarcity therefore depends on the relationship between what people want and what is available in that time and place.
Resource Allocation Decisions
Resource allocation means deciding how scarce resources are used and who receives the goods and services that are produced. Because resources are finite, no economy can produce everything its people want, so choices are unavoidable. These choices are usually summarised as three basic questions.
- What to produce: which goods and services should be made, and in what quantities? For example, should more resources go into schools or into roads?
- How to produce: which production methods should be used? A firm might use many workers and few machines, or few workers and many machines.
- For whom to produce: how should the output be shared out? Who gets the houses, the food and the medical care, and on what basis?
Whenever a choice is made, something is given up. The value of the next best alternative that is sacrificed is called opportunity cost. It is the true cost of any decision, because the resources used for one purpose could have been used for another.
Consider a fictional town council with a fixed budget. It decides to build a new clinic rather than repair the town bridge. The clinic is the choice; the improved bridge is the opportunity cost. Notice that the opportunity cost is the best alternative forgone, not every alternative forgone.
Economic Goods and Free Goods
An economic good is a good or service that is scarce relative to the demand for it. Producing it uses up resources, so it has an opportunity cost, and it normally sells at a price in a market. Bread, mobile phones, haircuts and textbooks are all economic goods.
A free good is a good so abundant that using it involves no opportunity cost. Nobody has to give up anything else to consume it, and nobody pays a price for it. Air to breathe and sunlight are the standard examples. Very few goods are genuinely free, and the number falls as populations and pollution grow.
| Feature | Economic goods | Free goods |
|---|---|---|
| Supply compared with wants | Scarce; wants exceed supply | Abundant; supply exceeds wants at that time and place |
| Opportunity cost | Yes, because resources are used up | No opportunity cost in normal use |
| Price | Normally bought and sold at a price | No price is paid |
| Examples | Bread, phones, textbooks, a bus journey | Air to breathe, sunlight, sea water in the open ocean |
| Can the position change? | May become free if supply rises or wants fall | May become economic if it becomes scarce |
Key Terms
- Scarcity: the situation in which wants are greater than the resources available to satisfy them.
- Finite resources: resources that exist in limited amounts and can be fully used up or fully employed.
- Infinite wants: human desires that are unlimited and never completely satisfied.
- Economic problem: the need to choose how to allocate scarce resources to satisfy unlimited wants.
- Resource allocation: deciding how scarce resources are used and who receives the goods and services produced.
- Opportunity cost: the value of the next best alternative given up when a choice is made.
- Economic good: a scarce good or service that uses resources, has an opportunity cost and normally has a price.
- Free good: a good so abundant that using it involves no opportunity cost and no price.
- Factors of production: land, labour, capital and enterprise, the resources used to produce goods and services.
Practice Questions
Explain what is meant by the basic economic problem. [2 marks]
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The basic economic problem is that wants are unlimited or infinite (1 mark), while the resources available to satisfy them are finite or limited, so choices have to be made (1 mark). A full-mark answer must include both sides of the problem: unlimited wants and limited resources.
Explain why a government must make choices about how to use a country's resources. Use one example to support your answer. [4 marks]
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Resources such as land, labour, capital and enterprise are finite, so they cannot be used for everything at once (1 mark). The wants of the population are unlimited and keep changing (1 mark). The government must therefore decide what to produce, how to produce it and for whom (1 mark). Any choice creates an opportunity cost: for example, spending a fixed budget on new hospitals means that a new road cannot be built, so the road is the opportunity cost (1 mark).
Discuss whether a country with large amounts of natural resources can avoid the basic economic problem. [6 marks]
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Knowledge and understanding (2 marks): the basic economic problem exists because wants are infinite while resources are finite, so scarcity and choice apply to every economy. Application and analysis (2 marks): a resource-rich country can produce more goods and raise living standards, but its resources are still finite and may be used up, and rising incomes usually create new and larger wants. Producing more of one good still means producing less of another, so opportunity cost remains, and even abundant natural goods such as clean air can become scarce. Evaluation and judgement (2 marks): the country cannot escape the problem, because wants will always exceed what can be produced. Plentiful resources change the size and pattern of the choices, not the need to choose. A strong answer reaches a supported conclusion rather than simply listing advantages and disadvantages.