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The Basic Economic Problem

What would you do if you showed up to your first day of a new class and you found that there were 16 classmates joining you, but there were only six chairs in the room. Your teacher tells you that unfortunately we’re going to have to live with the six chairs that we have and for some reason the other ten chairs have been taken by the school for some other use.

So he tells you, you got to work it out. It’s up to you guys to decide who gets the chairs and how often to get them. The chairs have suddenly become what we in economics call a scarce resource.

You’ve probably never been in the situation before. Of course, most good schools would make sure that all students had a chair. But, in my class, this isn’t always the case.

Scarcity

Scarcity is what we and economists know as the basic economic problem. Something is scarce when it is limited in supply and in demand. Not all resources are scarce.

For example, air is something that everybody demands. In fact, we all needed to live. However, it is not limited in supply. The amount of air in our atmosphere, at least at the present time, is nearly infinite. It’s enough for all humans to breathe and consume the air that they need without infringing on others. Consumption of that air is not the case for all resources that we require anytime. Certain individuals in society demand a good. Yet, that good is limited in supply. It is known as a scarce resource.

Scarcity is the basic problem of economics. The very reason we have a social science known as economics is to help society deal with the scarcity of natural and other resources that we depend on for our well being.

Scarcity necessitates choices

What does this mean?

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It means that when there are competing wants and needs of society, yet a limited amount of resources, choices must be made about how to allocate scarce resources efficiently and sometimes we might say equitably. The very problem of scarcity gives rise to the need for a system for allocating scarce resources between society’s competing wants and needs.

So, what kind of systems of allocation do we have to choose from?

In my class, I left it up to my students who decide how they would allocate our scarce chairs between each other. Let’s reflect on some of the systems that they’ve come up with in the past and discuss about what might be considered the most efficient or equitable system.

Based on the observations of economists that have studied problems like this throughout history, here are some of the systems for allocating the scarce chairs, that my students have come up with.

Today and in years past, some of the more popular ones tend to be systems like first-come, first-serve. In other words, whoever gets the class first, gets access to a chair.

Other systems that have been proposed are oldest first. In other words, seniority; a system of seniority determines who gets chairs based on age. Whoever’s oldest gets the chairs and whoever’s youngest does not.

Other systems that have been proposed are merit. In other words, those who have the highest grades, get chairs.

Students have also proposed a lottery system. Just put all the names in a hat, the first six names that get drawn, get the chairs.

Ultimately most years, somebody comes up with the idea of an auction. In the auction system, students get to bid on chairs and those who are willing to pay the most for chairs ultimately get to have the chairs after completing this exercise.

I asked my students to reflect on the different systems that they have proposed and choose one. Then, we’re actually going to do that to determine who gets the chairs.

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So, what would an economist say about the scarce chairs exercise?

Economists would recognize the chairs that are scarce. In other words, limited in supply. Yet, everybody wants one.

These are symbolic of most of the resources that we must decide, how to use in society. Today, mineral resources, water resources, other natural resources such as those derived from the forests, labor resources are also scarce. People themselves are a scarce resource; skilled labour, low skilled labor. If resources and labor were not scarce, then there wouldn’t be a price attached to them.

Teachers are scarce. Therefore, we get paid to teach. Factory workers are scarce. Therefore, they get paid to work in the factory. Oil is scarce. Therefore, oil companies get paid when they extract the resource from the earth and sell it to the end-users. Scarcity is the basic problem on which the study of economics is based.

Economics studies the allocation of society, scarce resources between its competing wants and needs, economic systems.

They provide society with the tools to determine who gets what resources and how they are allocated between societies.

In the rest of our study of Economics, we’re basically going to be building on this problem of scarcity. What we’ll look at, is the different systems that have been developed and implemented over time for allocating scarce resources between societies’ wants and needs.

We’ll use different tools including models, graphs, diagrams, formulae, mathematics, to understand how society’s scarce resources can be most efficiently and in some cases equitably or fairly distributed between those in society, who need and want the most.

Resource Credits to EconTeacher@Zeecollege

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