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Chapter 1 Scarcity and Choices
The Basic Economic Problem
What is the basic economic problem? Various problems may come to mind: poverty,
unemployment, inflation, recession, budget deficits, etc. There are many economic problems.
But…
The basic economic problem is scarcity.
Imagine that you are stranded all alone on an island. Maybe you landed on the island after being
shipwrecked, like Robinson Crusoe or Gilligan. Or maybe your plane crashed into the ocean, like
Tom Hanks in “Castaway”.
But there you are. On an island. All alone. Just you and your economic wants. What do you
want? Well, you want water, food, shelter, and a way back to civilization. If you are unable to
make your way back to civilization, you will soon want new clothing, medical care, recreation, etc.
To meet these wants, you must produce goods and services. So you use the resources available
to produce goods and services in order to satisfy your wants as well as possible.
But how well will you be able to satisfy your wants? Would you expect to eventually achieve a
standard of living that is totally satisfying, where there is nothing else that you want? Probably
not. Even if you achieved a relatively high standard of living, you would prefer it to be higher.
Even if your island were flowing with coconut milk and honey, you would still long for chocolate.
By your human nature, you will tend to always want more. This is one side of the problem of
scarcity…
Human wants are unlimited.
Example 1: Imagine that a person could be transported through time from the America of two
hundred years ago to the America of today. This time traveler would be amazed at our high
standard of living. They would see the average American consuming food, shelter, clothing,
transportation, medical care, recreation, etc. in quantities and qualities that would seem incredible
to them. They might assume that most modern Americans are perfectly satisfied with their
standard of living, desiring nothing more. But that is not the case. We all want more. And even the
time traveler would quickly grow accustomed to the relative abundance of modern America.
Soon they would notice things that they wanted and did not have – a bigger house, a nicer car, a
faster computer, membership in a country club, fashionable new eyeglasses, an iPad, etc. The
list of human wants is unlimited.
Back on the island, how will you go about trying to satisfy your unlimited wants? You will produce,
using the resources available to you. On the island, your resources are very limited. You have
only your own labor, the land and other natural resources of the island, and whatever capital
goods you are able to produce yourself. And since you are forced to be self-sufficient, specialized
resources that might be very valuable in a developed economy (e.g. your computer programming
skills) may be of little value on the island.
Forced to practice self-sufficiency, your standard of living is likely to be very low. You may be
unable to produce enough output even to stay alive. If only you could get back to civilization,
where resources are so much more abundant. Then you could have everything that you want!
Or could you? No. Even in the most productive societies, it is not possible to produce all of
everything that everyone wants. Even where resources are abundant, they are limited. This is the
other side of the problem of scarcity…
Resources are limited.
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