Scarcity and Central Problems of an Economy

Concept of Scarcity:

The concept of scarcity was first given by ‘Lionel Robbins’.

It refers to a situation where demand for goods and services exceeds its availability. A condition of inefficiency where human beings are incapable to fulfill their wants in a sufficient manner. In other words, it is a situation of fewer resources in comparison to unlimited human wants. Human wants are unlimited. Thus, scarcity explains this relationship between limited resources and unlimited wants and the problem therein.

Scarcity is at the core of economics because without this concept macroeconomics and microeconomics research would be rendered meaningless. However, scarcity is a relative concept as it can only be defined about human wants. It means a good and service may be scarce for someone but at the same time, it might be abundant for someone else. For example, there are lots of oil resources in ‘gulf countries’ but it is scarce in India. So, we can say that scarcity cannot used in the absolute sense.

For example: –

• Waste of water through long showers or allowing water to run while brushing one’s teeth can contributes to scarcity of water.
• Flooding in Nigeria washed farmlands away and has the potential to create a scarcity of food for the residents of the nation.
• An undereducated population in a country that needs high level skilled workers can result in a scarcity of labor.

NOTE:

Scarcity means limitedness, which is used in the context of natural resources, that can be reproduced but still scarce as at a given point of time, the availability is limited.

The Shortage, on the other hand, is a market phenomenon, used for products and services which are not available in the required quantity.

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COMPARISON CHART

BASIS FOR COMPARISON	SCARCITY	SHORTAGE
Meaning	Scarcity refers to a state when a resource is available in a finite quantity at a particular point in time.	Shortage means a situation in which the offers of a product is less than the bids.
Occurrence	Scarcity is when something is rare and difficult to reproduce.	The shortage is when an item is popular and easy to get but sometimes supply does not satisfy demand.
Nature	Permanent	Temporary
Created by	Nature	Market
Used for	Natural resources	Products and services
Results from	Falling prices	Rising Prices

Yet, the concept of scarcity also emerged as concept of “Economic problem”

• ECONOMIC PROBLEM: It is the problem of choice or problem of resource allocation. According to Milton Friedman, “An economic problem exists whenever source means are used to satisfy alternative ends. If means are not scarce, there is no problem at all”. For example: a land can be used to construct a factory building or to make a beautiful park or to raise agricultural crops. So, it is very essential to think how limited resources can be used alternatively to satisfy some wants of people to get maximum satisfaction as possible.

Reasons to arise Economic Problem

SCARCE RESOURCES: Resources are limited about their demand and the economy cannot make available the resources for all the people. This is the basic cause of all economic problems. The concept of scarcity is ubiquitous and applies to all individuals, organizations, and countries.

ALTERNATIVE USES: Resources are not only scarce but can also be put to various uses. This involves making choices among the optimum use of resources. For example: if a “rikshaw puller” has 1000/- in his pocket, rather spend it on a mobile phone, laptop, etc. He will have spent it on necessary commodities like rice, wheat etc.

UNLIMITED HUMAN WANTS: Human wants are endless, i.e., they can never be fully contented. As one want is satisfied many other wants emerge. In this way, wants to arise one after another. The second want arises after the satisfaction of the first want, the third after the second, and so on. This endless circle of wants continues throughout human life.

Scarcity and choice go together

We are living in a world of scarcity. All of us have numerous wants like better education, transportation, health facilities, housing, etc. But these all require resources which are not available enough to meet all our wants. It is a fundamental concept for all whether rich or poor, developing or developed nation. So, to satisfy ourselves maximum we have to make choices, we have to assign priorities to our wants as per the requirements.

For example, with your father’s salary/profit, you can buy an I-phone or go for a trip but he will not allow you this till he fulfills all the requirements like rent of the house, ration for the month, your fee, e-bill, etc. So, what is he doing he is choosing the most urgent want to be fulfilled first and so on.

The problem of scarcity and choice of land into the situation of “Allocation of resources” which is simply referred to as Central problems of an economy.

CENTRAL PROBLEMS THAT ARE FACED BY EVERY ECONOMY OF A COUNTRY

Production, distribution, and disposition of goods and services are the basic economic activities of life. Because of scarcity, every society has to decide how to allocate scarce resources efficiently.

It leads to the emergence of following central problems that are faced by every economy:

• What to produce?
• How to produce?
• For whom to produce?

These problems are called central problems because these are the most basic problems of an economy and all the other problems revolve around them.

WHAT TO PRODUCE

This problem involves the selection of goods and services to be produced and the quantity to be produced for each selected commodity.

Every economy has scarce resources and thus cannot produce all the goods more of one good or service usually means less of others. For example: In a piece of land more production of wheat implies less production of mustard. Similarly, the production of war goods is possible only by reducing the production of civil goods.

So, the economy has to decide which goods should be produced and in what quantities. This is a problem of allocation of resources among different goods.

This problem has two aspects:

1. WHICH COMMODITIES ARE TO BE PRODUCE: Every economy has to decide, which consumer goods (bread, clothes etc.) and which of the capital goods (machinery, equipment etc.) are to be produced. In the same manner, economy has to make a choice between and goods (bread, butter etc.) and war goods (guns, tanks etc.)
2. IN WHAT QUANTITY: After deciding the goods to be produces, economy has to decide the quantity of each commodity that is selected. It means, if this involves a decision regarding the quantity to be produced, of consumer and capital goods, civil and war goods and so on.

GUIDING PRINCIPLES: Allocate the resources in a manner that gives maximum aggregate satisfaction.

HOW TO PRODUCE

It involves the choice of technique to be used for the production of goods and services. There are different techniques of production. The term technique here is used in the sense that in which particular combination inputs are used.

Techniques are classified as:

• LABOUR INTENSIVE TECHNIQUES: This means more of labor and less of machines used for production.
• CAPITAL INTENSIVE TECHNIQUE: This means more of capital and less of labor used for production.  For example: To dig a well a zamindar can hire either more labor and a little capital or with less labor and more capital (mud rotary, air rotary etc.)

Selection of technique is made to achieve the objective of raising the standard of living of people and to provide employment to everyone.

For example: In India, LIT is used to the abundance of labor, whereas countries like the USA, England, etc. prefer CIT due to shortage of labor and abundance of capital.

GUIDING PRINCIPLE: Combine factors of production in such a manner so that maximum output is produced at minimum cost, use the least possible scarce resources.

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FOR WHOM TO PRODUCE

Owing to the paucity of resources, an economy cannot produce goods for all sections of the sty to the desired extent. So ultimately it has to decide whether to produce goods for poorer and less rich or richer and less poor.

Goods are produced for these people who have the paying capacity. The capacity of people to pay for goods depends upon their level of income. It means, this problem is concerned with the distribution of income among the factors of production (land, labor, capital, and enterprise) who contribute to the production process.

The problem can be categorized under two main heads:

1. PERSONAL DISTRIBUTION: It means how national income of an economy is distributed among different groups of people. Under personal distribution, we study pattern of distribution of NY. For example: why is the share of the wage-earning class in the national income lower than the other Classes? Why is the rent of one piece of land or how higher (or lower) than the other?
2. FUNCTIONAL DISTRIBUTION: It explains the share of total national income received by each factor of production. In other words, it related to the distribution of rewards for the services of the factors of production. For example: rent for the land, wages for labor, interest for capital etc.

GUIDING PRINCIPLE: It ensures that the urgent wants of each productive factor are fulfilled to the maximum possible extent.

SOME MORE ECONOMIC PROBLEMS RELATED TO UNDERDEVELOPED ECONOMIES:

1. HOW EFFICIENTLY ARE THE RESOURCES BEING UTILISED?

The society has to see whether the resources it owns are being utilized fully or not. In case, the resources of the economy are lying idle, it has to find out ways and means to utilize them fully. In an economy where the available resources are being fully utilized, it is characterized by technical efficiency or full employment.

IS THE ECONOMY GROWING?

The last and the most important problem is to find out whether the economy is growing through time or is it stagnant. If the economy is stagnant at any point inside the production possibility curve; economic growth takes place through a higher rate of capital formation which consists of replacing existing capital goods with new and more productive ones by adopting more efficient production techniques or through innovations.