Question

Explain the role ‘scarcity of resources’ plays in economic decision making.

Answer 1

Scarcity is one of the key economic problems. The scarcity issue means we need to consider how to generate with limited resources and what to do. It means that the cost of making economic decisions involves constant opportunities. By placing a higher price on scarce goods, economics solves the problem of scarcity. The high price discourages demand and encourages companies to come up with alternatives.

If a good is scarce, the supply will drop, causing the price to rise. This rising price serves as a warning in a free market and thus demand for the good falls (movement along demand curve). The higher price of the good also provides businesses with opportunities to: look for alternative sources of the good, e.g. new oil supplies from Antarctic Search for alternatives such as solar panel cars.
If we couldn't find alternatives to oil, then we'd have to respond with less transport. On transatlantic flights, people would cut back and make fewer trips.

Demand is inelastic in the short term. People with gasoline cars must continue to buy gasoline. Over time, though, people can buy electric cars or bikes, so demand for gasoline is dropping. In the course of time, competition is more cost elastic. Therefore, market mechanisms were promoted to deal with the issue of scarcity in a free market. There is, nevertheless, a potential market risk. For example, until it's too late, firms may not think about the future. Therefore, there may not be any practical alternative that has been developed when the good becomes scarce.

Another issue with the free market is that since commodities are rationed by price, many citizens may run the risk of not being able to afford to buy those goods; they have less revenue. Economics is therefore also concerned with redistributing income in order to help everyone be able to afford necessities Another potential market failure is environmental scarcity. Decisions that we take in this present generation may affect future resource availability for future generations. Development of CO2 emissions, for instance, leads to global warming, rising sea levels, and thus future generations will face fewer available land and drinking water shortages.