The Fundamental Economic Problem

Look around you and you will notice one important thing none of the people around you will be happy and satisfied with what they have. For instance, a person with no house of his own would be wanting to have a small house of his own, one with a small house may want to own a bigger house, one with big house will desire a mansion of his own.

People always desire and want more than what they have, ask people to make a list of things they want and you will find things one would never hope to obtain but still in the list.

Scarcity

The fundamental economic problem facing all societies is that of scarcity. Scarcity is the condition that results from society not having enough resources to produce all things people would like to have.

The below figure explains how scarcity affects every decision that we make. This is where the study of economics comes in. Economics is the study of how people try to satisfy their unlimited wants with limited resources.

 

Needs and Wants

We often hear about economists talking about needs and wants. A need is a basic requirement necessary for survival of life such as food, clothing and shelter. Want is something we would like to have but is not necessary for survival. Because many foods will satisfy the need for nourishment, the range of things represented by the term want is much broader than that represented by the term need.

Because resources are limited, everything we do has a cost—even when it seems as if we are getting something “for free.” For example, do you really get a free meal when you use a “buy one, get one free” coupon? The business that gives it away still has to pay for the resources that went into the meal, so it usually tries to recover these costs by charging more for its other products. In the end, you may actually be the one who pays for the “free” lunch!

Realistically, most things in life are not free, because someone has to pay for producing them in the first place. Economists use the term TINSTAAFL to describe this concept. In short, it means There Is No Such Thing As A Free Lunch.

Reference:

Economics – Principles and Preferences, 2008 Ed, Clayton.

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