APMacro: Scarcity Choices and Opportunity Cost

People’s economic wants are numerous and varied. Humans need air, water, clothing, and shelter. But in contemporary society, we also seek the many goods and services that provide a comfortable or affluent standard of living. Society has productive resources: labor, tools and machinery, land and mineral deposits, that are used to produce goods and services. This production satisfies many of our economic wants and occurs through the organizational mechanism called the economic system or the economy. However, our economic wants exceed the productive capacity of our limited or scarce resources. So the complete satisfaction of society’s economic wants is impossible. This truth underlies our definition of economics. It is the social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.

From our definition of economics, it is easy to see why economists view the world through the lens of scarcity. Since human and property resources are scarce or limited, it follows that the goods and services we produce must also be limited. Scarcity limits our options and necessitates that we make choices. Because we can’t have it all, we must decide what we will have and what we must forgo. At the core of economics is the idea that “there is no such thing as a free lunch” (TINSTAAFL). You may get treated to lunch, making it free to you, but there is a cost to someone.Scarce inputs of land, equipment, farm labor, the labor of cooks and waiters, and managerial talent are required. Because these resources could be used in alternative production activities, they and the other goods and services they could have produced are sacrificed in making the lunch available. Economists call these sacrifices opportunity costs. To get more of one thing, you forgo the opportunity of getting something else. So the cost of that which you get is the value of that which is sacrificed to obtain it.

The necessity and consequences of choices can best be understood through a production possibilities model. each point on the production possibilities curve represents some maximum output of two products. The curve is the frontier because it shows the limit of attainable outputs. To obtain the various combinations of the two products, society must achieve both full employment and productive efficiency. Points lying inside or to the left of the curve are also attainable, but they reflect inefficiency and therefore not as desirable as points on the curve. Points inside the curve imply that the economy could have more of both products if it achieved full employment and productive efficiency. Points lying outside or to the right of the production possibilities curve, would represent a greater output than the output of any point on the curve. Such points are unattainable with the current supplies of resources and technology.



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