Scarcity, the economic problem and free goods

Last time

Before we start: last time, in Opportunity cost and the production possibility curve, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

The basic economic problem

Every economy in the world, rich or poor, faces the same problem. People's wants are unlimited. But the resources to satisfy them are limited. That gap between the two is called scarcity, and the whole of economics starts from it.

What scarcity means

Scarcity means there are not enough resources to produce everything that people want. It is not a shortage in one shop for a week. It is permanent, and it affects everyone. Needs are the things we must have to survive: food, water, shelter and clothing. Wants are everything else we would like to have, such as a new phone, a holiday or a car. As incomes rise, people want more and better things, so wants grow faster than resources. That is why scarcity never goes away, even in the richest country.

Why the problem never ends

Cambridge asks you to explain why the economic problem is always likely to exist. The mark scheme gives the reason: wants grow faster than resources. Resources can grow too. New land is reclaimed, more workers are trained, more machines are built. But they can never keep up with every new want. So every person, firm and government must choose. Scarcity forces choice, and every choice means giving something up.

From scarcity to opportunity cost

Here is the chain you will use again and again: scarcity forces a choice, and every choice has an opportunity cost, the next best thing you give up. Learn it as three linked words.

The three questions

Because resources are scarce, every economy has to answer three questions. First: what to produce? More hospitals or more roads, more wheat or more cotton? Second: how to produce? With many workers and few machines, or with many machines and few workers? Third: for whom to produce? Who gets the goods and services once they are made, and how much does each person get? Different economic systems answer these three questions in different ways, as you will see in chapter two.

Who faces scarcity

Consumers have limited incomes, so they choose what to buy. A family with a fixed monthly income cannot buy everything it wants. Workers have limited time, so they choose which job to do, and how many hours to work instead of resting. Producers have limited resources, so they choose what to make and how. Governments have limited tax revenue, so they choose what to spend on.

Economic goods

An economic good is one that takes resources to produce. Making it uses land, labour, capital or enterprise that could have made something else. So an economic good has an opportunity cost, and it is scarce compared with the demand for it. That is why it usually has a price. Bread, mobile phones, school buildings and bus rides are all economic goods.

Free goods

A free good is one that takes no resources to produce. Nature supplies it, and there is enough of it for everyone who wants it. So a free good has no opportunity cost. When you breathe air, nobody has to give anything up. The mark scheme accepts air or oxygen, sunlight, wind and sea water. It does not accept fish or stone, because catching fish and cutting stone use resources.

A free good is not a public good

The examiner wrote that some candidates confused free goods with public goods. A street light is free to walk under, but it is not a free good. Building and running street lights uses resources: metal, electricity and workers. Those resources could have made something else, so there is an opportunity cost. A zero price does not make a free good either. A free school meal costs the school, or the government, real resources.

Free or economic?

Here are five items sorted. Only the two that nature supplies with no resources at all are free goods.

A free good can become scarce

A good is only free while there is enough for everyone at no cost. Clean river water was once a free good in many places. When a city grows and the river is polluted, clean water now needs pipes, pumps and treatment plants. It has become an economic good. So always ask: does it use resources to supply it, here and now? That decides which kind of good it is.

Mistakes that lose marks

Mistake one: calling scarcity a shortage. A shortage is short-term and in one market. Scarcity is permanent and everywhere. Mistake two: giving a public good, such as a street light, as an example of a free good. Mistake three: saying a good is free because its price is zero. The fix: a free good uses no resources, so it has no opportunity cost.

The full-marks tip

The full-marks tip: define scarcity with both halves: limited resources and unlimited wants. For a free good, say it has no opportunity cost, and give air or sunlight as the example.

On one card

So, on one card: scarcity and the economic problem. Keep it for revision.