Question

1. Define the terms scarcity and opportunity cost. Explain how these two terms form the core of neoclassical economics.

Answer 1

Scarcity refers to the economic principle that resources are always in limited quantity and it should be efficiently used to satisfy the needs and wants. It means that scarcity always belongs to resources that are in short supply. In comparison to the scarcity, opportunity cost refers to the cost of second best opportunity foregone. For example, with a given resource, 5 cars or 10 bikes can be produced. Then, opportunity cost of producing 1 car = 10/5 = 2 bikes. Here, opportunity cost is also considered as implicit cost.
Scarcity and opportunity cost has huge importance for neoclassical economics, as this form of economics focuses upon utility maximization with the given resources and resources are scarce. So, to achieve the utility maximization and fulfill the objective of neoclassical economics, consumers apply opportunity cost principles with the scarce resource and demand those goods with the lowest opportunity cost. So, it is the scarcity and opportunity cost that help in utility maximization.