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What Is Scarcity?

Understanding scarcity.

  • Natural Resource Scarcity

Relative Scarcity of Inputs

Scarcity as market mover.

  • Scarcity FAQs

Scarcity: What It Means in Economics and What Causes It

economics essay on scarcity

Scarcity is an economics concept rooted in one of the most basic facts of life: We live in a world of limited resources that requires choices about how they are allocated. In that sense, every product down to a pack of gum or a book of matches is scarce, since someone expended resources that could have been deployed elsewhere to produce it.

Scarcity is so fundamental to economics that scarce goods are also known as economic goods. In economics, scarce goods are those for which demand would exceed supply at a price of zero.

Some natural resources that may appear to be free because they are easily and widely accessible eventually prove scarce as they are depleted from overuse in a tragedy of the commons . Economists increasingly view clean air and a climate compatible with human welfare as scarce goods because of the significant cost of protecting them, and may place a price on them for the purposes of a cost-benefit analysis .

Key Takeaways

  • In economics, the concept of scarcity conveys the opportunity cost of allocating limited resources.
  • Scarce goods are those for which demand would exceed supply if they were free
  • Common resources like clean air and a sustainable climate have been increasingly recognized as scarce, with costs as well as value.
  • Scarcity can also be used to denote the relative availability of production inputs or the decrease in the supply of a resource or product relative to demand over time.

Investopedia / Mira Norian

In his 1932  An Essay on the Nature and Significance of Economic Science , British economist Lionel Robbins defined the discipline in terms of scarcity:

Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

In a hypothetical world in which everything of value—from food and water to masterworks of art—were so abundant it had no cost, economists would have nothing to study. There would be no need to make decisions about how to allocate resources, hence no need for theories about the interplay of such decisions and tradeoffs in an economy.

In the real world, on the other hand, all factors of production have a cost and therefore so too does every product. Every input incurs an opportunity cost because it can't be put to alternate use as a result. This opportunity cost reflects the inputs' scarcity.

Natural Resource Scarcity

Even abundant common resources long consumed at zero apparent cost often prove neither free nor limitless eventually. Climate isn't a tangible asset and its value is hard to calculate, but the costs of climate change for companies as well as the society are all too real. Air is free, but clean air has a cost in terms of the economic activity discouraged to prevent pollution, as well as value for health and quality of life .

To preserve the benefits associated with these resources, governments may require manufacturers and utilities to invest in pollution control equipment, or to adopt cleaner power sources. Governments and the regulated industries eventually pass on these costs to taxpayers and consumers. Breathing freely, in other words, is not really free.

While scarcity is fundamental to economics and the human condition, the term is also used to describe the relative availability of factors or production or economic inputs.

For example, imagine a hypothetical widget requiring just two labor inputs: workers and managers, with one manager required per 20 workers. Imagine further that the available labor pool consists of 20,000 workers and 5,000 managers. Clearly, there are more available workers than managers. Yet in terms of the proportion required to produce the widgets, workers are the relatively scarce resource, since they're required in a ratio of 20 per manager for production, but outnumber managers by a ratio of only 4 to 1 in the labor pool.

The factors of production compared this way could just as easily be land and dairy cattle. If pasture land were the limiting factor in milk production, land could be said to be relatively scarce. Conversely, if the principal production constraint were the size of the herd, cattle would be the relatively scarce factor of production.

Scarcity may also be used to denote a change in a market equilibrium raising the price of the resource based on the law of supply and demand . In those instances, scarcity denotes a decrease over time in the supply of the product or commodity relative to the demand for it.

The growing scarcity reflected in the higher price required to attain a market equilibrium could be attributable to one or more of the following:

  • Demand-induced scarcity reflecting rising demand
  • Supply-induced scarcity caused by diminished supply
  • Structural scarcity attributable to mismanagement or inequality

Does Scarcity Mean Something Is Hard to Obtain?

None of the economic definitions of scarcity requires a product or resource to be unavailable to be called scarce. In fact, the definition of a market price is one at which supply equals demand, meaning all those willing to obtain the resource at a market price can do so. Scarcity can be used to explain a market shift to a higher price, to compare the availability of economic inputs, or to convey the opportunity cost involved in allocating limited resources.

Are There Goods That Are Not Scarce?

This article is free to read. Other forms of easily reproduced intellectual property , including films and music, derive their scarcity from copyright protection , while the inventors of new drugs and devices must secure patents to deter imitators. In a world of limited resources, many apparently free goods may have an indirect or hidden cost . If the free stock trade does not ensure best execution , perhaps it has a cost, just like clean air.

How Can a Society Deal With Scarcity?

Societies can deal with scarcity by increasing supply. The more goods and services available to all, the less scarcity there will be. Of course, increasing supply comes with limitations, such as production capacity, land available for use, time, and so on. Another way to deal with scarcity is by reducing demand. Rising prices may play that role in market economies , while command economies might use quotas or rationing . In practice, mixed economies also frequently use quotas and price caps .

SSRN. " Relative Prices and Climate Policy: How the Scarcity of Non-Market Goods Drives Policy Evaluation ."

Energy & Climate Intelligence Unit. “ Climate Economics - Costs and Benefits .”

Lionel Robbins. “ An Essay on the Nature and Significance of Economic Science ," Page 15. MacMillan, 1932. Download PDF.

ScienceDirect. " Population and Technological Change in Agriculture ."

Economics Help. " Scarcity in Economics ."

economics essay on scarcity

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Scarcity in economics

Definition: Scarcity refers to resources being finite and limited. Scarcity means we have to decide how and what to produce from these limited resources. It means there is a constant opportunity cost involved in making economic decisions. Scarcity is one of the fundamental issues in economics.

Examples of scarcity

  • Land – a shortage of fertile land for populations to grow food. For example, the desertification of the Sahara is causing a decline in land useful for farming in Sub-Saharan African countries.
  • Water scarcity – Global warming and changing weather, has caused some parts of the world to become drier and rivers to dry up. This has led to a shortage of drinking water for both humans and animals.
  • Labour shortages . In the post-war period, the UK experienced labour shortages – insufficient workers to fill jobs, such as bus drivers. In more recent years, shortages have been focused on particular skilled areas, such as nursing, doctors and engineers
  • Health care shortages . In any health care system, there are limits on the available supply of doctors and hospital beds. This causes waiting lists for certain operations.
  • Seasonal shortages. If there is a surge in demand for a popular Christmas present, it can cause temporary shortages as demand as greater than supply and it takes time to provide.
  • Fixed supply of roads . Many city centres experience congestion – there is a shortage of road space compared to number of road users. There is a scarcity of available land to build new roads or railways.

How does the free market solve the problem of scarcity?

If we take a good like oil. The reserves of oil are limited; there is a scarcity of the raw material. As we use up oil reserves, the supply of oil will start to fall.

Diagram of fall in supply of oil

fall-supply-oil-price-ar

If there is a scarcity of a good the supply will be falling, and this causes the price to rise. In a free market, this rising price acts as a signal and therefore demand for the good falls (movement along the demand curve). Also, the higher price of the good provides incentives for firms to:

  • Look for alternative sources of the good e.g. new supplies of oil from the Antarctic.
  • Look for alternatives to oil, e.g. solar panel cars.
  • If we were unable to find alternatives to oil, then we would have to respond by using less transport. People would cut back on transatlantic flights and make fewer trips.

Demand over time

higher-price-oil-elasticity-time-lag

In the short-term, demand is price inelastic. People with petrol cars, need to keep buying petrol. However, over time, people may buy electric cars or bicycles, therefore, the demand for petrol falls. Demand is more price elastic over time.

Therefore, in a free market, there are incentives for the market mechanisms to deal with the issue of scarcity.

Causes of scarcity

fall-s-rise-d-scarcity

Scarcity can be due to both

  • Demand-induced scarcity
  • Supply-induced scarcity

and a combination of the two. See more at: Causes of scarcity.

Scarcity and potential market failure

With scarcity, there is a potential for market failure. For example, firms may not think about the future until it is too late. Therefore, when the good becomes scarce, there might not be any practical alternative that has been developed.

Another problem with the free market is that since goods are rationed by price, there may be a danger that some people cannot afford to buy certain goods; they have limited income. Therefore, economics is also concerned with the redistribution of income to help everyone be able to afford necessities.

Another potential market failure is a scarcity of environmental resources. Decisions we take in this present generation may affect the future availability of resources for future generations. For example, the production of CO2 emissions lead to global warming, rising sea levels, and therefore, future generations will face less available land and a shortage of drinking water.

The problem is that the free market is not factoring in this impact on future resource availability. Production of CO2 has negative externalities, which worsen future scarcity.

Tragedy of the commons

The tragedy of the commons occurs when there is over-grazing of a particular land/field. It can occur in areas such as deep-sea fishing which cause loss of fish stocks. Again the free-market may fail to adequately deal with this scarce resource.

Further reading on Tragedy of the Commons

Quotas and scarcity

One solution to dealing with scarcity is to implement quotas on how much people can buy. An example of this is the rationing system that occurred in the Second World War. Because there was a scarcity of food, the government had strict limits on how much people could get. This was to ensure that even people with low incomes had access to food – a basic necessity.

A problem of quotas is that it can lead to a black market; for some goods, people are willing to pay high amounts to get extra food. Therefore, it can be difficult to police a rationing system. But, it was a necessary policy for the second world war.

Related pages

  • Opportunity cost
  • Production possibility frontiers
  • Is economics irrelevant in the absence of scarcity?
  • Dealing with food scarcity

12 thoughts on “Scarcity in economics”

  • Pingback: Is Economics Irrelevant in Absence of Scarcity? | Economics Help

Good from what are you doing but you have to provide to us some of sample questions concerning the University level

l want to be explained further on scarcity as it is becoming hard topic for me to understand

When we even make a choice we have to forgo the other alternative.The alternative forgone in making am informed choice is also known as oppotunity

I really learned a lot in this website, thank you very much I appreciate

I want my text book explanation of social subject

Actually, I don’t understand about the entrepreneurship.. Can you please help me?.. I’m a senior high student for the upcoming school year..and We don’t have a actual class so please could you help me to understand this?😅

Thank you so much its clear

This makes some sense but the graphs just messed my head up pls help

I enjoyed the nature of information

The only “problem” with the free market is when it is interfered with. It is a natural process, by interfering with it you are indirectly interfering with nature. Everything on our planet is finite, everything has to be paid for. Every action has an equal and opposite reaction. The is no free lunch. Interfering with the free market is like kicking a can down the road, it may seem just and righteous in the instant, but it is by no means sustainable ultimately over time.

Thank you so much

Comments are closed.

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Module 1: Economic Thinking

Understanding economics and scarcity, learning objectives.

  • Describe scarcity and explain its economic impact
  • Describe factors of production

Photo of Kansas summer wheat and storm panorama: dark purplish sky, brilliant golden wheat field.

Figure 1. Food, like the wheat shown here, is a scarce good because it exists in limited supply.

The resources that we value—time, money, labor, tools, land, and raw materials—exist in limited supply. There are simply never enough resources to meet all our needs and desires. This condition is known as scarcity.

At any moment in time, there is a finite amount of resources available. Even when the number of resources is very large, it’s limited. For example, according to the U.S. Bureau of Labor Statistics, in 2016, the labor force in the United States contained more than 158 million workers—that’s a lot, but it’s not infinite. Similarly, the total area of the United States is 3,794,101 square miles—an impressive amount of acreage, but not endless. Because these resources are limited, so are the numbers of goods and services we can produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

Throughout the course, you will find these “Try It” boxes with questions to help you check your understanding and apply the concepts from the reading. Choose an answer, then select “check answer” to get feedback about how you did.

When faced with limited resources, we have to make choices. Again, economics is the study of how humans make choices under conditions of scarcity. These decisions can be made by individuals, families, businesses, or societies.

Let’s consider a few decisions that we make based on limited resources. Take the following:

1. What classes are you taking this term?

Are you the lucky student who is taking every class you wanted with your first-choice professor during the perfect time and at the ideal location? The odds are that you have probably had to make trade-offs on account of scarcity. There is a limited number of time slots each day for classes and only so many faculty available to teach them. Every faculty member can’t be assigned to every time slot. Only one class can be assigned to each classroom at a given time. This means that each student has to make trade-offs between the time slot, the instructor, and the class location.

2. Where do you live?

Think for a moment, if you had all the money in the world, where would you live? It’s probably not where you’re living today. You have probably made a housing decision based on scarcity. What location did you pick? Given limited time, you may have chosen to live close to work or school. Given the demand for housing, some locations are more expensive than others, though, and you may have chosen to spend more money for a convenient location or to spend less money for a place that leaves you spending more time on transportation. There is a limited amount of housing in any location, so you are forced to choose from what’s available at any time. Housing decisions always have to take into account what someone can afford. Individuals making decisions about where to live must deal with limitations of financial resources, available housing options, time, and often other restrictions created by builders, landlords, city planners, and government regulations.

Watch it: Scarcity and Choice

Throughout this course you’ll encounter a series of short videos that explain complex economic concepts in very simple terms. Take the time to watch them! They’ll help you master the basics and understand the readings (which tend to cover the same information in more depth).

As you watch the video, consider the following key points:

  • Economics is the study of how humans make choices under conditions of scarcity.
  • Scarcity exists when human wants for goods and services exceed the available supply.
  • People make decisions in their own self-interest, weighing benefits and costs.

Problems of Scarcity

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything.

Economics helps us understand the decisions that individuals, families, businesses, or societies make, given the fact that there are never enough resources to address all needs and desires.

Economic Goods and Free Goods

Most goods (and services) are economic goods , i.e. they are scarce. Scarce goods are those for which the demand would be greater than the supply if their price were zero. Because of this shortage, economic goods have a positive price in the market. That is, consumers have to pay to get them.

What is an example of a good which is not scarce? Water in the ocean? Sand in the desert? Any good whose supply is greater than the demand if their price were zero is called a free good , since consumers can obtain all they want at no charge. We used to consider air a free good, but increasingly clean air is scarce.

Productive Resources

Having established that resources are limited, let’s take a closer look at what we mean when we talk about resources. There are four productive resources (resources have to be able to produce something), also called factors of production :

  • Land:  any natural resource, including actual land, but also trees, plants, livestock, wind, sun, water, etc.
  • Econ omic capital:  anything that’s manufactured in order to be used in the production of goods and services. Note the distinction between financial capital (which is not productive) and economic capital (which is). While money isn’t directly productive, the tools and machinery that it buys can be.
  • Labor:  any human service—physical or intellectual. Also referred to as human capital .
  • Entrepreneurship : the ability of someone (an entrepreneur) to recognize a profit opportunity, organize the other factors of production, and accept risk.

Productive resources and factors of production are explained again in more detail in the following video:

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  • What Is Economics, and Why Is It Important?. Authored by : OpenStax College. Provided by : Rice University. Located at : https://cnx.org/contents/[email protected]:mdNAtxNF/What-Is-Economics-and-Why-Is-I . License : CC BY: Attribution . License Terms : Download for free at http://cnx.org/contents/[email protected]
  • Kansas Summer Wheat and Storm Panorama. Authored by : James Watkins. Located at : https://www.flickr.com/photos/23737778@N00/7115229223/ . License : CC BY: Attribution
  • Episode 2: Scarcity and Choice. Authored by : Dr. Mary J. McGlasson. Located at : https://www.youtube.com/watch?v=yoVc_S_gd_0 . License : CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives
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Scarcity

Introduction

In economics, scarcity refers to limitations–limited goods or services, limited time, or limited abilities to achieve the desired ends. Life would be so much easier if everything were free! Why can’t I get what I want when I want it? Why does everything cost so much and take so much effort? Can’t the government, or at least the college or local town, or if not that, my parents just give it to me–or at least make a law so that if I want to buy pizza, there is a pizza shop nearby that has to sell me pizza at a dollar a slice?

That you can’t have everything you want the moment you want it is a fact of life. Figuring out how individuals, families, communities, and countries might best handle this to their benefit is fundamental to what economics is about.

You are probably used to thinking of natural resources such as titanium, oil, coal, gold, and diamonds as scarce. In fact, they are sometimes called “scarce resources” just to re-emphasize their limited availability. Everyone agrees natural resources are scarce because they take a lot of effort, money, time, or other resources to get, or because there seems to be a finite amount available.

But what constitutes a lot of effort, money, time, or other resources? Does it matter if something is finite if we can easily substitute something else? It all depends on your circumstances. Most people don’t think of water as scarce, but if you live in a desert, water is scarce. If you are a teenager or in college, iPhones or the hottest sneakers or the recognition of your peers or a person of interest are as scarce–as difficult to acquire–as gold. If you are running out of space on your hard drive but you can substitute cloud computing, is storage space scarce?

In fact, economists view everything people want, strive for, or can’t achieve effortlessly as scarce. For example,

Every time you turn on the tap and get fresh water, that fresh water is part of what economists deem as scarce. Instead of paying your water bill, you could instead hike down to the local river and fill your water bottle in the local stream or creek, as did your forbears only 100 years ago. That would involve your time, and even in the most pure of natural circumstances your worry about whether deer might have polluted the stream or creek with bacteria. Not to mention if you want to shower in clean water or water the summer vegetables you want to grow with clean water. The air we breathe and the sun that shines on us is free. But if the air we breathe or the sunlight we bask in are not as perfect or fresh or unpolluted as we envision, are you personally willing to pay more to make it so? If we make sweeping governmental, regulatory changes, are we sure that those changes are not major changes that might affect our friends or others on the earth badly? Or that won’t come back to bite us, even making pollution worse? Time is scarce. Every minute you spend reading this is a minute you could alternatively spend reading a novel, catching a baseball game, talking to your friends or family, or working at a soup kitchen. Every time you have to give up something to enjoy what you want, the thing you want is scarce.

Since to an economist, everything people desire or demand is probably scarce, your next question may be how you can analyze the costs and benefits . Or you may want to know how to supply those desirable goods and services. You may want to ask more about productive resources , including natural resources . If you are intrigued by why diamonds–which seem so frivolous–cost so much more than water–which seems so essential, you might want to skip to margins and thinking at the margin .

Definitions and Basics

Natural Resource , from the Concise Encyclopedia of Economics

The earth’s natural resources are finite, which means that if we use them continuously, we will eventually exhaust them….

In the News and Examples

They Clapped: Can Price-Gouging Laws Prohibit Scarcity? , by Michael Munger. Econlib, January 8, 2007. See also associated podcast,

Munger on Price Gouging , on EconTalk.

Hurricane “Fran” smashed into the North Carolina coastline at Cape Fear at about 8:30 pm, 5 September 1996. It was a category 3, with 120 mph winds, and enormous rain bands. It ran nearly due north, hitting the state capital of Raleigh about 3 am, and moving north and east out of the state by morning…. There were no generators, ice, or chain saws to be had, none. But that means that anyone who brought these commodities into the crippled city, and charged less than infinity, would be doing us a service….

Chris Anderson on Free , EconTalk podcast. May 12, 2008.

Chris Anderson talks with EconTalk host Russ Roberts about his next book project based on the idea that many delightful things in the world are increasingly free–internet-based email with infinite storage, on-line encyclopedias and even podcasts, to name just a few. Why is this trend happening? Is it restricted to the internet? Is there really any such thing as a free lunch? Is free a penny cheaper than a penny or a lot cheaper than that? The conversation also covers whether economics has anything to say about free….

Richard McKenzie on Prices , EconTalk podcast. June 23, 2008.

Richard McKenzie of the University California, Irvine and the author of Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles, talks with EconTalk host Russ Roberts about a wide range of pricing puzzles. They discuss why Southern California experiences frequent water crises, why price falls after Christmas, why popcorn seems so expensive at the movies, and the economics of price discrimination….

Diane Coyle on the Soulful Science , EconTalk podcast.

Diane Coyle talks with host Russ Roberts about the ideas in her new book, The Soulful Science: What Economists Really Do and Why it Matters. The discussions starts with the issue of growth–measurement issues and what economists have learned and have yet to learn about why some nations grow faster than others and some don’t grow at all. Subsequent topics include happiness research, the politics and economics of inequality, the role of math in economics, and policy areas where economics has made the greatest contribution….

Daniel Botkin on Nature, the Environment and Global Warming , EconTalk podcast.

Daniel Botkin, ecologist and author, talks with EconTalk host Russ Roberts about how we think about our role as humans in the natural world, the dynamic nature of environmental reality and the implications for how we react to global warming….

A Little History: Primary Sources and References

Lionel Robbins , biography, from the Concise Encyclopedia of Economics

Robbins’ most famous book was An Essay on the Nature and Significance of Economic Science , one of the best-written prose pieces in economics. That book contains three main thoughts. First is Robbins’ famous all-encompassing definition of economics that is still used to define the subject today: “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.”…

Who coined the phrase “the dismal science”? See The Secret History of the Dismal Science: Economics, Religion, and Race in the 19th Century , by David M. Levy and Sandra J. Peart. Econlib, January 22, 2001.

Everyone knows that economics is the dismal science. And almost everyone knows that it was given this description by Thomas Carlyle, who was inspired to coin the phrase by T. R. Malthus’s gloomy prediction that population would always grow faster than food, dooming mankind to unending poverty and hardship. While this story is well-known, it is also wrong, so wrong that it is hard to imagine a story that is farther from the truth. At the most trivial level, Carlyle’s target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor….

Advanced Resources

Is Economics All About Scarcity? , by Arnold Kling. Blog discussion on EconLog, January 17, 2007.

… I am two-handed on this issue. On the one hand, just because food, say, has become more abundant does not mean that we can ignore scarcity. At any moment in time, for a given state of know-how, the conventional definition of economics as dealing with the allocation of scarce resources among competing ends applies. On the other hand, some of the most interesting economic observations concern relative abundance. Look at our standard of living compared to 100 years ago. Look at South Korea compared with North Korea. Robert Lucas famously said that “The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them it is hard to think of anything else.”…

Related Topics

Incentives Cost-Benefit Analysis Efficiency Productive Resources Property Rights What is Economics?

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2.1: Introduction to Choice in a World of Scarcity

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Chapter Objectives

In this chapter, you will learn about:

  • How Individuals Make Choices Based on Their Budget Constraint
  • The Production Possibilities Frontier and Social Choices
  • Confronting Objections to the Economic Approach

Bring It Home

Choices ... to what degree.

Does your level of education impact earning? Let’s look at some data from the Bureau of Labor Statistics (BLS). In 2020, among full-time wage and salary workers, median weekly earnings for those with a master’s degree were $1,545. Multiply this average by 52 weeks, and you get average annual earnings of $80,340. Compare that to the median weekly earnings for full-time workers aged 25 and over with just a bachelor’s degree: $1,305 weekly and $67,860 a year. What about those with no higher than a high school diploma in 2020? They earn an average of just $781 weekly and $40,612 over 12 months. In other words, data from the BLS indicates that receiving a bachelor’s degree boosts earnings by 67% over what workers would have earned if they only obtained a high school diploma, and a master’s degree yields average earnings that are nearly double those of workers with a high school diploma.

Given these statistics, we might expect many people to choose to go to college and at least earn a bachelor’s degree. Assuming that people want to improve their material well-being, it seems like they would make those choices that provide them with the greatest opportunity to consume goods and services. As it turns out, the analysis is not nearly as simple as this. In fact, in 2019, the BLS reported that while just over 90% of the population aged 25 and over in the United States had a high school diploma, only 36% of those aged 25 and over had a bachelor's or higher degree, and only 13.5% had earned a master's or higher degree.

This brings us to the subject of this chapter: why people make the choices they make and how economists explain those choices.

You will learn quickly when you examine the relationship between economics and scarcity that choices involve tradeoffs. Every choice has a cost.

In 1968, the Rolling Stones recorded “You Can’t Always Get What You Want.” Economists chuckled, because they had been singing a similar tune for decades. English economist Lionel Robbins (1898–1984), in his Essay on the Nature and Significance of Economic Science in 1932, described not always getting what you want in this way:

The time at our disposal is limited. There are only twenty-four hours in the day. We have to choose between the different uses to which they may be put. ... Everywhere we turn, if we choose one thing we must relinquish others which, in different circumstances, we would wish not to have relinquished. Scarcity of means to satisfy given ends is an almost ubiquitous condition of human nature.

Because people live in a world of scarcity, they cannot have all the time, money, possessions, and experiences they wish. Neither can society.

This chapter will continue our discussion of scarcity and the economic way of thinking by first introducing three critical concepts: opportunity cost, marginal decision making, and diminishing returns. Later, it will consider whether the economic way of thinking accurately describes either how we make choices and how we should make them.

1.1 What Is Economics, and Why Is It Important?

Learning objectives.

By the end of this section, you will be able to:

  • Discuss the importance of studying economics
  • Explain the relationship between production and division of labor
  • Evaluate the significance of scarcity

Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 expendable hours in the day to earn income to acquire goods and services, for leisure time, or for sleep. At any point in time, there is only a finite amount of resources available.

Think about it this way: In 2015 the labor force in the United States contained over 158 million workers, according to the U.S. Bureau of Labor Statistics. The total land area was 3,794,101 square miles. While these are certainly large numbers, they are not infinite. Because these resources are limited, so are the numbers of goods and services we produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

Introduction to FRED

Data is very important in economics because it describes and measures the issues and problems that economics seek to understand. A variety of government agencies publish economic and social data. For this course, we will generally use data from the St. Louis Federal Reserve Bank's FRED database. FRED is very user friendly. It allows you to display data in tables or charts, and you can easily download it into spreadsheet form if you want to use the data for other purposes. The FRED website includes data on nearly 400,000 domestic and international variables over time, in the following broad categories:

  • Money, Banking & Finance
  • Population, Employment, & Labor Markets (including Income Distribution)
  • National Accounts (Gross Domestic Product & its components), Flow of Funds, and International Accounts
  • Production & Business Activity (including Business Cycles)
  • Prices & Inflation (including the Consumer Price Index, the Producer Price Index, and the Employment Cost Index)
  • International Data from other nations
  • U.S. Regional Data
  • Academic Data (including Penn World Tables & NBER Macrohistory database)

For more information about how to use FRED, see the variety of videos on YouTube starting with this introduction.

If you still do not believe that scarcity is a problem, consider the following: Does everyone require food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In every country in the world, there are people who are hungry, homeless (for example, those who call park benches their beds, as Figure 1.2 shows), and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Let’s delve into the concept of scarcity a little deeper, because it is crucial to understanding economics.

The Problem of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for pay. If you do not, someone else does on your behalf. Yet most of us never have enough income to buy all the things we want. This is because of scarcity. So how do we solve it?

Visit this website to read about how the United States is dealing with scarcity in resources.

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything. How do we use our limited resources the best way possible, that is, to obtain the most goods and services we can? There are a couple of options. First, we could each produce everything we each consume. Alternatively, we could each produce some of what we want to consume, and “trade” for the rest of what we want. Let’s explore these options. Why do we not each just produce all of the things we consume? Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment. Most of us do not know how to do all—or any—of those things, but it is not because we could not learn. Rather, we do not have to. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith ( Figure 1.3 ) in his book, The Wealth of Nations .

The Division of and Specialization of Labor

The formal study of economics began when Adam Smith (1723–1790) published his famous book The Wealth of Nations in 1776. Many authors had written on economics in the centuries before Smith, but he was the first to address the subject in a comprehensive way. In the first chapter, Smith introduces the concept of division of labor , which means that the way one produces a good or service is divided into a number of tasks that different workers perform, instead of all the tasks being done by the same person.

To illustrate division of labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few. Smith counted 18 distinct tasks that different people performed—all for a pin, believe it or not!

Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located. A complex business like a large manufacturing factory, such as the shoe factory ( Figure 1.4 ), or a hospital can have hundreds of job classifications.

Why the Division of Labor Increases Production

When we divide and subdivide the tasks involved with producing a good or service, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith noticed that one worker alone might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to complete two or three of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons.

First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. (In later chapters, we will develop this idea by discussing comparative advantage .) People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, geography affects specialization. For example, it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota. If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more effective than if they produce a combination of things, some of which they are good at and some of which they are not.

Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better.

A similar pattern often operates within businesses. In many cases, a business that focuses on one or a few products (sometimes called its “ core competency ”) is more successful than firms that try to make a wide range of products.

Third, specialization allows businesses to take advantage of economies of scale , which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines. For example, if a factory produces only 100 cars per year, each car will be quite expensive to make on average. However, if a factory produces 50,000 cars each year, then it can set up an assembly line with huge machines and workers performing specialized tasks, and the average cost of production per car will be lower. The ultimate result of workers who can focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations is that society as a whole can produce and consume far more than if each person tried to produce all of their own goods and services. The division and specialization of labor has been a force against the problem of scarcity.

Trade and Markets

Specialization only makes sense, though, if workers can use the pay they receive for doing their jobs to purchase the other goods and services that they need. In short, specialization requires trade.

You do not have to know anything about electronics or sound systems to play music—you just buy an iPod or MP3 player, download the music, and listen. You do not have to know anything about artificial fibers or the construction of sewing machines if you need a jacket—you just buy the jacket and wear it. You do not need to know anything about internal combustion engines to operate a car—you just get in and drive. Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want. This is how our modern society has evolved into a strong economy.

Why Study Economics?

Now that you have an overview on what economics studies, let’s quickly discuss why you are right to study it. Economics is not primarily a collection of facts to memorize, although there are plenty of important concepts to learn. Instead, think of economics as a collection of questions to answer or puzzles to work. Most importantly, economics provides the tools to solve those puzzles.

Consider the complex and critical issue of education barriers on national and regional levels, which affect millions of people and result in widespread poverty and inequality. Governments, aid organizations, and wealthy individuals spend billions of dollars each year trying to address these issues. Nations announce the revitalization of their education programs; tech companies donate devices and infrastructure, and celebrities and charities build schools and sponsor students. Yet the problems remain, sometimes almost as pronounced as they were before the intervention. Why is that the case? In 2019, three economists—Esther Duflo, Abhijit Banerjee, and Michael Kremer—were awarded the Nobel Prize for their work to answer those questions. They worked diligently to break the widespread problems into smaller pieces, and experimented with small interventions to test success. The award citation credited their work with giving the world better tools and information to address poverty and improve education. Esther Duflo, who is the youngest person and second woman to win the Nobel Prize in Economics, said, "We believed that like the war on cancer, the war on poverty was not going to be won in one major battle, but in a series of small triumphs. . . . This work and the culture of learning that it fostered in governments has led to real improvement in the lives of hundreds of millions of poor people.”

As you can see, economics affects far more than business. For example:

  • Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.
  • It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in general. When the U.S. government came close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues? Did you know?
  • A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument. When you hear classmates, co-workers, or political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

The study of economics does not dictate the answers, but it can illuminate the different choices.

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Scarcity, Decision-Making, and Macroeconomics Essay

Introduction, effect of scarcity on “bandwidth”, impact of scarcity on macroeconomics, works cited.

Scarcity is the problem that the vast majority of citizens of practically every country in the world suffer from. Such issues as pressing needs, financial obstacles, and absence of support tend to have a substantial impact on one’s personal development and an overall way of living. The inability to concentrate on a particular task due to distractive thoughts about an ill parent/child or the need to make provision for a family usually plays a huge disservice in the matters of general work performance. It is evident that the person facing no serious financial hardships appears to be a more productive worker than the one having those. Regarding the nature of scarcity, Liodakis points out that it arrives as a direct reflection of various political, economic, and socio-ecological crises that humanity has been encountering throughout its history (221). Many people today become caught by a debt pit, which empties all the available savings and leaves no room for a trouble-free existence.

To begin with, the term “bandwidth” was first introduced by Sendhil Mullainathan and Eldar Shafir to define human ability to manage various activities. As stated in their book, “bandwidth refers to our cognitive capacity and our ability to pay attention, make good decisions, stick with our plans, and resist temptations” (Mullainathan and Shafir 60). The researchers point out that a person’s ability to make judgments and decisions can be seriously influenced by such a concept as scarcity. The experiment that the scholars have conducted on farmers in India has shown that the same individuals demonstrate different results of brain activity depending on their financial/material situation. Thus, the bandwidth was measured twice: before and after harvest. In the period before harvest farmers were exposed to higher irritation and showed poorer intellectual abilities. However, the situation changed to the direct opposite after the harvest had been gathered. People could solve more complex tasks and easily coped with the tests based on Raven’s matrices. The experiment has proven that scarcity does affect the human ability to think rationally.

Regarding my educational goals, scarcity was a crucial factor to determine my vision of the future and help with the choice of profession. I clearly realized that I needed higher education to succeed financially. While still being a student of a high school I made a strict decision to study business and economics to alleviate the hardships our family had to deal with as long as I had been studying at school. Now as a college student I believe that my current profession will allow me to acquire a job that will solve my issues once and for all. In order to get a required experience, I am ready to work part-time as long as my schedule permits me to.

Eventually, being poor requires using more mental resources compared to well-to-do people. Regarding the state economies, a scarcity mindset of the key political and economic figures leads to much higher mistakes’ occurrence and less effective decision-making in comparison to governments with bigger financial cushions (Gennetian and Shafir 905). When having an insufficient amount of resources, industrial organizations are exposed to the need for making concessions and operating on less beneficial conditions, which then leads to a decline in incomes. As Gennetian and Shafir point out, “suboptimal decisions are often the result of a specific mindset created by the demands and circumstances of poverty” (907). These decisions tend to have a negative impact on organizational performance and the overall productivity of the industrial sector. Moreover, they often lead to an increase in unemployment rates since companies are forced to reduce staff due to an unstable economic situation.

In order to alleviate the disruptive effect of a scarcity mindset, the U.S. Federal Government needs to create a favorable environment for every citizen to achieve a desired level of well-being. For that purpose to be reached, some significant changes in taxation policy need to be made for a private sector to show a streaming increase in entrepreneurs’ quantity. It is recommended that newly arriving companies are relieved of the need to pay general taxation during the first year of operation. Such measures would allow one to substantially reduce unemployment and stimulate a home-based production of goods. With these changes being applied, the problem of a scarcity mindset would be resolved once and for all.

The research provides enough evidence to the fact that scarcity is the problem creating plenty of obstacles on one’s way to goals’ achievement. People who are exposed to dealing with financial and personal issues tend to think and behave differently compared to those having no such concerns. The same approach applies to economics: a scarcity mindset of a government staff leads to a whole variety of negative consequences and may even result in a decline in the economic sector. For that not to happen, the Federal Government needs to resort to the new measures of problem elimination and provide an effective taxation policy for regular citizens to finally change a given mindset.

Gennetian, Lisa A., and Eldar Shafir. “The Persistence of Poverty in the Context of Financial Instability: A Behavioral Perspective.” Journal of Policy Analysis and Management , vol. 34, no. 4, 2015, pp. 904-936.

Liodakis, George. “An Exploration of Scarcity in Historical Perspective.” Science & Society, vol. 80, no. 2, 2016, pp. 221-247.

Mullainathan, Sendhil, and Eldar Shafir. Scarcity: Why Having Too Little Means So Much . Macmillan, 2013.

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Bibliography

IvyPanda . "Scarcity, Decision-Making, and Macroeconomics." September 1, 2020. https://ivypanda.com/essays/scarcity-decision-making-and-macroeconomics/.

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  • The Scarcity Principle and Its Social Implications
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  • US Federal Budget and Economic Scarcity
  • Scarcity as a Current Economic Issue
  • The Analysis of Harvest Farms Foods Inc. Company
  • Trend Analysis: Water Scarcity Issue
  • Can Europe Be Saved?
  • Spain and Its Unemployment Problems
  • The Role of the US in Developing Haiti's Economy
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  • Euro Area Debt Crisis, Its Causes and Challenges

Essay on Economics

economics essay on scarcity

In this essay we will discuss about Economics. After reading this essay you will learn about: 1. Subject Matter of Economics 2. Economics as a Science 3. Economics as an Art 4. Neo-Classical View of Marshall 5. The Classical View of Adam Smith 6. Basic Concepts of Economics 7. Types of Goods in Economics 8. Utility in Economics.

  • Essay on Utility in Economics

Essay # Subject Matter of Economics :

Broadly speaking, the formulation of a definition is a precise procedure of explaining the subject matter. The majority of economic thinkers from Adam Smith to Pigou have defined the subject matter of economics as the study of the causes of material welfare or as the science of wealth.

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Marshall, in particular, confined it to the consumption, production, exchange and distribution of wealth by men engaged in the ordinary business of life. Men who are rational beings and act under the existing social, legal and institutional set up. It excludes the behaviour and activities of socially undesirable and abnormal persons like drunkards, misers, thieves, etc.

Professor Robbins, however, finds this subject matter as too restricted in scope to embrace all the facts. He cites numerous examples to show that certain human activities possess a definite economic significance but have little or no connection with material welfare.

The same good or service may promote material welfare at one time and less than one set of circumstances and not at another time under different circumstances. Robbins is, therefore, of the view that for a good or service to have economic significance it must command a price.

And for a good or service to command a price, it is not essential that it must promote material welfare, rather it must be scarce and capable of being put to alternative uses. Thus economics is not concerned so much with the analysis of the consumption, production, exchange and distribution of wealth as with a special aspect of human behaviour-that of allocating scarce means among competing ends.

This fundamental problem is ever present in all times and places and in all sets of circumstances. Thus the subject matter of economics includes the daily activities of the household, of the competitive business world and the administration of public resources in order to solve the problem of scarcity of resources.

The subject matter of economics includes the study of the problems of consumption, production, exchange and distribution of wealth, as well as the determination of the values of goods and services, the volume of employment and the determinants of economic growth. Besides, it includes the study of the causes of poverty, unemployment, underdevelopment, inflation, etc. and steps for their removal.

Essay # Economics as a Science :

There is considerable disagreement among economists whether economics is a science and if it is so, is it a positive or a normative science? In order to answer these questions, it is essential to know what science is and to what extent the characteristics of science are applicable to economics.

A science is a systematized body of knowledge ascertainable by observation and experimentation. It is a body of generalisations, principles, theories or laws which traces out a causal relationship between cause and effect.

For any discipline to be a science:

(i) It must be a systematized body of knowledge;

(ii) Have its own laws or theories;

(iii) Which can be tested by observation and experimentation?

(iv) Can make predictions;

(v) Be self-corrective; and

(vi) Have universal validity. If these features of a science are applied to economics, it can be said that economics is a science.

Economics is a systematized body of knowledge in which economic facts are studied and analysed in a systematic manner. For instance, economics is divided into consumption, production, exchange, distribution and public finance which have their laws and theories on whose basis these departments are studied and analysed in a systematic manner.

Like any other science, the generalisations, theories or laws of economics trace out a causal relationship between two or more phenomena. A definite result is expected to follow from a particular cause in economics like all other sciences.

An example of a principle in chemistry is that, all other things being equal, a combination of hydrogen and oxygen in the proportion of 2: 1 will form water. In physics, the law of gravitation states that things coming from above must fall to the ground at a specific rate, other things being equal.

Similarly, in economics, the law of demand tells us that other things remaining the same, a fall in price leads to extension in demand and a rise in price to contraction in demand. Here rise or fall in price is the cause and, contraction or extension is its effect. Hence economics is a science like any other science which has its own theories and laws which establish a relation between cause and effect.

Economics is also a science because its laws possess universal validity such as the law of diminishing returns, the law of diminishing marginal utility, the law of demand, Gresham’s law, etc. Again, economics is a science because of its self-corrective nature.

It goes on revising its conclusions in the light of new facts based on observations. Economic theories or principles are being revised in the fields of macroeconomics, monetary economics, international economics, public finance and economic development. But certain economists do not accord economics the status of a science because it does not possess the other features of a science.

Science is not merely a collection of facts by observation. It also involves testing of facts by experimentation. Unlike natural sciences, there is no scope for experimentation in economics because economics is related to man, his problems and activities.

Economic phenomena are very complex as they relate to man whose activities are bound by his tastes, habits, and social and legal institutions of the society in which he lives. Economics is thus concerned with human beings who act irrationally and there is no scope for experimentation in economics.

Even though economics possesses statistical, mathematical and econometric methods of testing its phenomena but these are not so accurate as to judge the true validity of economic laws and theories. As a result, exact quantitative prediction is not possible in economics. For instance, a rise in price may not lead to contraction in demand rather it may expand it if people fear a shortage in anticipation of war.

Even if demand contracts as a result of the rise in price, it is not possible to predict accurately how much the demand will contract. Thus, as opined by Marshall: “In sciences that relate to man exactness is less attainable.” But this does not mean that economics is not a science.

It is definitely a science like any other science. Biology and Meteorology are those sciences in which the scope for predictability is less. The law of tides explains why the tide is strong at a new and full moon and weak at the moon’s first quarter.

At the same time, it is possible to predict the exact hour when the tide will rise. But it may not happen so. The tide may rise earlier or later than the predicted time due to some unforeseen circumstances. Marshall, therefore, compared the laws of economics with the laws of tides rather than with the simple and exact law of gravitation.

For the actions of men are so various and uncertain, that the best statement of tendencies, which we can make in a science of human conduct, must needs be inexact and faulty.

Essay # Economics as an Art:

Art is the practical application of scientific principles. According to J. N.Keynes, “An art is a system of rules for the attainment of given ends.” Science lays down certain principles while art puts these principles into practical use.

To analyse the causes and effects of poverty falls within the purview of science and to lay down principles for the removal of poverty is art. Art facilitates the verification of economic theories. As pointed out by the Italian economist Cossa, “Art directs, art un-poses, predicts or proposes rules. It solves general economic problems.” Economics is thus both a science and an art in this sense.

However, certain economists do not consider it advisable to treat economics as both a science and an art. For the pressure of practical problems will hinder the development of economics as a science. This will, in turn, react on the effectiveness of the corresponding art.

Therefore, any attempt to solve a particular economic problem in full will so complicate the problem that the work may become hopeless. For this reason, Marshall regarded economics as “a science pure and applied, rather than a science and an art.”

Economists today are realising more and more the need for practical application of the conclusions reached on important economic problems. Therefore, “Economics should not be considered as a tyrannical oracle whose word is final. But when the preliminary work has been truly done, Applied Economics will at certain times on certain subjects speak with the authority to which it is entitled.”

Economics is thus regarded both a science and an art, though economists prefer to use the term applied economics in place of the latter. Samuelson opines, “Economics is the oldest of the arts, the newest of sciences indeed the queen of all the social sciences.”

Economics—Positive or Normative Science :

Before we discuss whether economics is a positive or normative science, let us understand their meanings which are best described by J.N. Keynes (father of Lord Keynes) in these words:

“A positive science may be defined as a body of systematized knowledge concerning what is, a normative science as a body of systematized knowledge relating to criteria of what ought to be, and concerned with the ideal as distinguished from the actual.” Thus positive economics is concerned with “what is” and normative economics with “what ought to be.”

Economics as a Positive Science :

It was Robbins who in his An Essay on the Nature and Significance of Economic Science brought into sharp focus the controversy as to whether economics is a positive or a normative science.

Robbins’ View:

Robbins regards economics as a pure science of what is, which is not concerned with moral or ethical questions. Economics is neutral between ends. The economist has no right to pass judgment on the wisdom or folly of the ends itself.

He is simply concerned with the problem of scarce resources in relation to the ends desired. The manufacture and sale of cigarettes and wine may be injurious to health and therefore morally unjustifiable, but the economist has no right to pass judgment on this, since both satisfy human wants and involve economic activity.

Following the classical economists, Robbins regards the propositions involving the verb ought as different in kind from the proposition involving the verb is. He finds a ‘logical gulf’ between the positive and normative fields of enquiry as they “are not on the same plane of discourse.”

Since “Economics deals with ascertainable facts” and “ethics with valuations and obligations,” he finds no reason for “not keeping them separate, or failing to recognise their essential difference.” He, therefore, opines that “the function of economists consists in exploring and not advocating and condemning.”

Thus an economist should not select an end, but remain neutral, and simply point out the means by which the ends can be achieved.

Friedman’s View:

Like Robbins, Friedman also considers economics as a positive science. According to him, “the ultimate goal of a positive science is the development of a ‘theory’ or ‘hypothesis’ that yields valid and meaningful (not truistic) predictions about phenomena not yet observed.” In this context, economics provides systematic generalisations which can be used for making correct predictions.

Since the predictions of economics can be tested, economics is a positive science like physics which should be free from value judgments. According to Friedman, the aim of an economist is like that of a true scientist who formulates new hypotheses.

Hypotheses permit us to predict about future events or to explain only what happened in the past. But predictions of such hypotheses may or may not be limited by events. Thus economics claims to be a positive science like any other natural science.

Conclusion:

Thus economics is a positive science. It seeks to explain what actually happens and not what ought to happen. This view was held even by the nineteenth century economists. Almost all leading economists from Nassau Senior and J.S. Mill onwards had declared that the science of economics should be concerned with what is and not with what ought to be.

Economics as a Normative Science :

Economics is a normative science of “what ought to be.” As a normative science, economics is con­cerned with the evaluation of economic events from the ethical viewpoint. Marshall, Pigou, Hawtrey, Frazer and other economists do not agree that economics is only a positive science.

They argue that economics is a social science which involves value judgments’ and value judgments cannot be verified to be true or false. It is not an objective science like natural sciences. This is due to the following reasons.

First, the assumptions on which economic laws, theories or principles are based relate to man and his problems. When we try to test and predict economic events on their basis, the subjectivity element always enters.

Second, economics being a social science, economic theories are influenced by social and political factors. In testing them, economists are likely to use subjective value judgements.

Third, in natural sciences, experiments are conducted which lead to the formulation of laws. But in economics experimentation is not possible. Therefore, the laws of economics are at best tendencies.

Conclusion :

Thus the view that economics is only a positive science is divorced from reality. The science of econom­ics cannot be separated from the normative aspect. Economics as a science is concerned with human welfare and involves ethical considerations. Therefore, economics is also a normative science.

As pointed out by Pigou, Marshall believed that “economic science is chiefly neither valuable neither as an intellectual gymnastics nor even as a means of winning truth for its own sake, but as a handmaid of ethics and a servant of practice.”

On these considerations, economics is not only “light-bearing,” but also “fruit- bearing.” Economists cannot afford to be mere spectators and arm-chair academicians. “An economist who is only an economist,” said Fraser “is a poor pretty fish.”

In this age of planning when all nations aspire to be welfare states, it is only the economist who is in a position to advocate, condemn and remedy the economic ills of the modern world. “When we elect to watch the play of human motives that are ordinary—that are something mean and dismal and ignoble,” wrote Prof. Pigou, “our impulse is not the philosopher’s impulse, knowledge for the sake of knowledge but rather the physiologist’s knowledge for the healing that knowledge may help to bring.” It is not enough for the economist to explain and analyse the problems of unequal distribution of wealth, industrial peace, social security, etc. Rather his work is to offer suggestions for the solution of such problems.

Had he remained a mere theoretician, poverty and misery and class-conflicts would have been the lot of mankind. The fact that economists are called upon to pronounce judgements and tender advice on economic problems shows that the normative aspect of the economic science has been gaining ground ever since the laissez-faire spirit became dead.

Wootton is right when she says, “It is very difficult for economists to divest their discussions completely of all normative significance.” Myrdal is more forthright when he says that economics is necessarily value-loaded and “a ‘disinterested social science’ has never existed and, for logical reasons, cannot exist.”

About the relation between normative and positive economics, Friedman observes: “The conclusions of positive economics seem to be, and are, immediately relevant to important normative problems, to questions of what ought to be done and how any given goal can be attained.”

Normative economics cannot be independent of positive economics, though positive economics is free from value judgements. Economics is, therefore, not only a positive science of “what is” but also a normative science of “what ought to be.”

Essay # Robbins Scarcity Definition of Economics:

It was Lord Robbins who with the publication of his Nature and Significance of Economic Science in 1932 not only revealed the logical inconsistencies and inadequacies of the earlier definitions but also formulated his own definition of economics. According to Robbins, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

This definition is based on the following related postulates:

1. Economics is related to one aspect of human behaviour, of maximising satisfaction from scarce resources.

2. Ends or wants are scarce. When a particular want is satisfied others crop up to take its place. Multiplicity of wants makes it imperative for human beings to work ceaselessly for their satisfaction but they are usable to satisfy all.

3. The obvious reason for the non-satisfaction of unlimited wants is the scarcity of means at the disposal of mankind. The time and means available for satisfying these ends are scarce or limited.

4. The scarce means are capable of alternative uses. Land is capable of being used for growing rice, sugarcane, wheat, maize, etc. Likewise, coal can be made use of in factories, railways, for generation of electricity, etc. At a time, the use of a scarce resource for one end prevents its use for any other purpose.

5. The ends are of varying importance which necessarily leads to the problem of choice—of selecting the uses to which scarce resources can be put.

6. Economics is related to all kinds of behaviour that involve the problem of choice. This clearly distinguishes economics from technical, political, historical or other aspects. The problem of how to build a college building with given resources is technical.

But the problem of choosing the best combination of resources or the problem of allocating given building resources between an auditorium, library, laboratory, and lecture rooms, cycle-shed and canteen is economic. Thus economics is related to the valuation process which studies the production and distribution of goods and services for fulfilling the needs of mankind.

To conclude, economics is essentially a valuation process which is concerned with multiple ends and scarce means being put to alternative uses in order of their importance. In the ultimate analysis, the economic problem is one of economizing scarce means in relation to numerous ends.

Superiority of Robbins’ Definition :

Robbins’ definition is superior to the earlier definitions in more than one way.

Firstly, it does not contain such vague expressions as ‘material welfare’ and ‘material requisites of well are being’ which had made the neo-classical formulations classificatory. His definition, therefore, is analytical for it does not attempt to pick out certain kinds of behaviour, but focuses attention on a particular aspect of behaviour, the form imposed by the influence of scarcity.

Secondly, Robbins emphasizes that economics is a science. It is a systematized body of knowledge which gives its proud possessor a framework within which to analyse the problems associated with the study. Like other pure sciences, economics is neutral between ends.

The ends may be noble or ignoble, material or immaterial, economic or non-economic, economics is not concerned with them as such. Economics has thus nothing to do with Ethics. For, according to Robbins, “Economics deals with ascertainable facts. Ethics with valuation and obligations. The two Fields of inquiry are not on the same plane of discourse.”

Thirdly, Robbins has made economics a valuation process. Whenever the ends are unlimited and the means are scarce, they give rise to an economic problem. In such a situation, there is little need for defining economics as the study of the causes of material welfare. The problems of production and distribution of wealth are also of economizing scarce resources in relation to varied ends.

Lastly, there is universality in Robbin’s scarcity definition of economics. It is as much applicable to a Robinson Crusoe economy as to a communist economy and a capitalist economy. Its laws are like the laws of life and are independent of all legal and political frameworks. All this led economists to describe Robbins’ definition as the “dominant academic doctrine” of the times.

Criticisms of Robbins’ Definition :

Many economists have criticized Robbins’ definition on the following grounds:

1. Artificial Relation between Ends and Means:

Some critics characterize the relationship between ends and scarce means as presented by Robbins as “artificial schemaIn his definition, Robbins fails to explain fully the nature of ‘ends’ and the difficulties associated with it.”

2. Difficult to Separate Ends from Means:

Robbins’ assumption of definite ends is also unacceptable because immediate ends may act as intermediaries to further ends. In fact, it is difficult to separate ends from means distinctly. Immediate ends may be the means to the achievement of further ends, and means by themselves may be the ends of earlier actions.

3. Economics not Neutral between Ends:

Economists have criticized Robbins’ definition for its ethical neutrality. Robbins’ contention that “Economics is neutral between ends” is unwarranted. Unlike physical sciences, economics is concerned not with matter but with human behaviour. It is, therefore, not possible for economists to dissociate economics from Ethics.

4. Neglects the Study of Welfare:

Robbins’ formulation of economizing scarce means in relation to ends for the solution of all economic problems is simply a valuation problem. This has tended to narrow the jurisdiction of economics. According to Boulding, “Prof. Robbins in defining economics as a valuation problem seems to deprive economics of the right to study welfare.” Economics will be an incomplete body of knowledge without the study of welfare which Robbins neglects.

5. Economics not Merely a Positive but also a Normative Science:

By concentrating exclusively on the valuation problem, Robbins has made economics a positive science. But economists like Souter, Parsons, Wootton, and Macfie regard it not only a positive science but also a normative science. According to Macfie, “Economics is fundamentally a normative science, not merely a positive science like chemistry.”

6. Robbins’ Definition too Narrow and too Wide:

Robertson regards Robbins’ definition “at once too narrow and too wide.” It is too narrow since it does not include organisational defects which lead to idle resources. On the other hand, the problem of allocating scarce means among given ends is such that it may arise even in fields which lie outside the jurisdiction of economics.

The captain of a team in a playground or an army commander in battlefield may be faced with the problem of scarce resources in the event of a member being injured. Thus, Robbins’ scarcity formulation is applicable even to non-economic problems thereby making the scope of economics too wide.

7. Economics Concerned with Social Behaviour rather than Individual Behaviour:

Robbins’ concep­tion of economics is essentially a micro analysis. It is concerned with individual behaviour, of economizing ends with the limited means at his disposal. But economics is not concerned with individualistic ends and means alone.

It has nothing to do with a Robinson Crusoe economy. Our economic problems are related to social rather than individual behaviour. Robbins’ definition is, therefore, steeped in classical tradition and fails to emphasize the macro-economic character of economics.

8. Fails to Analyse the Problems of Unemployment of Resources:

Robbins’ scarcity formulation pos­sesses little practical usefulness as it fails to analyse the causes of general unemployment of resources. Unemployment is caused not by scarcity of resources but by their abundance. It is, therefore, only in a fully employed economy that the problem of allocating scarce resources among alternative uses arises.

Thus the scarcity definition of Robbins, applicable as it is to a fully employed economy, is unrealistic for analysing the economic problems of the real world.

9. Does not Offer Solutions to the Problems of LDCs:

Robbins’ conception of economics offers no solution to the problems of underdeveloped countries. The problems of underdeveloped countries are con­cerned with the development of unused resources. Resources are in abundance in such economies but they are either unutilized, or underutilised or misutilised.

Robbins’ scarcity formulation, however, takes the resources as given and analyses their allocation among alternative uses.

10. Neglects the Problems of Growth and Stability:

Robbins’ scarcity definition neglects the problems of growth and stability which are the corner stone’s of the present day economics.

Of the two definitions of welfare and scarcity, it is not possible to say with precision which is better than the other.

As Boulding opines:

“To define it as a study of mankind in the ordinary business of life, is surely too broad. To define it as the study of material wealth is too narrow. To define it as the study of human valuation and choice is again probably too wide, and to define it as the study of that part of human activity subject to the measuring rod of money is again too narrow.” He, therefore, agrees with Jacob Viner that “Economics is what economists do.”

However, the truth is that keeping in view the present day trend of establishing welfare states in the world; the welfare definitions are more practicable whereas the scarcity definitions are more scientific.

A satisfactory definition must combine both these conceptions of economics. We may define economics as a social science concerned with the proper use and allocation of resources for the achievement and mainte­nance of growth and stability.

Essay # Neo-Classical View of Marshall :

It was, however, the neo-classical school led by Alfred Marshall which gave economics a respectable place among social sciences. Marshall laid emphasis on man and his welfare. Wealth was regarded as the source of human welfare, not an end in itself but a means to an end.

According to Marshall, “Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well­being. Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.”

Certain logical inferences can be drawn from Marshall’s definition.

First, economics is concerned with man’s ordinary business of life. It is related to his wealth-getting and wealth-using activities. Or, as Marshall put it: It “deals with his [man’s] efforts to satisfy his wants, in so far as the efforts and wants are capable of being measured in terms of wealth or its general representative, i.e. money.”

Secondly, economics is a social science. It “is a study of men as they live and move and think in the ordinary business of life.” Thus, economics is concerned with the economic aspects of social life. It excludes the activities of socially undesirable and abnormal persons like thieves, misers, etc.

Thirdly, it is related to those economic activities which promote material welfare. Non-economic activities and activities having ignoble ends are excluded from the study of economics. Lastly, by using the broad term ‘Economics’ in place of the narrower term ‘Political Economy’, Marshall lifted economics to the realm of a science and divested it of all political influences.

Marshall, however, emphasised that economics is concerned with wealth simply by accident and its “true philosophic raison d’etre must be sought elsewhere.” Robbins, therefore, in his Essay on the Nature and Significance of Economic Science finds fault with Cannan’s enunciation of the welfare conception of economics on the following grounds.

1. Distinction between Material and Non-Material things Faulty:

Robbins criticizes the distinction between material and non-material things as established by the neo-classical economists. The latter include only those activities within the scope of economics which lead to the production and consumption of material goods and services.

Robbins, however, regards all goods and services which command a price and enter into the circle of exchange as economic whether they are material or non-material.

The services of teachers, lawyers, actors, etc. have each their economic aspect, because they are scarce and possess value. To say that services are non-material “is not only perverse, it is also misleading. For it is not the materiality of even material means of gratification,” says Robbins, “which gives them their status as economic goods; it is their relation to valuations. The ‘materialist’ definition of Economics, therefore, misrepresents the science as we know it.”

2. Economics not concerned with Material Welfare:

Robbins also objects to the use of the word welfare along with material. For the neo-classical economists, economics is concerned with the causes of material welfare. To Robbins, however, there are certain material activities but they do not promote welfare.

For example, the manufacture and sale of wine is an economic activity but it is not conducive to human welfare. Such goods are significant from the economic point of view because they are scarce and have value.

3. Contradiction:

There is a contradiction in the “non-material definition of productivity”, used by Marshall. He regards the services of opera singers and dancers as productive so long as they are demanded by the people. But since they are non-material, they do not promote human welfare. As such, their services are not the subject matter of economics.

Robbins, however, points out that “the services of the opera dancer are wealth. Economics deals with the pricing of their services, equally with the pricing of the services of a cook. He, therefore, concludes: “Whatever Economics is concerned with, it is not concerned with the causes of material welfare as such.”

4. Concept of Economic Welfare Vague:

The idea of economic welfare is vague. Money cannot be regarded as an accurate measure of welfare, for the conception of welfare is subjective and relative. The idea of welfare varies with each individual. Wine may give pleasure to a drunkard, but it may be harmful for the novice.

Again, it may be useful for people living in Siberia and Iceland but injurious for those living in hot climates. This interpersonal comparison of utility implies value judgment, which transports economics to the realm of Ethics. But Robbins has nothing to do with Ethics. To him, Economics is entirely neutral between ends. The ends may be noble or base, the economist is not concerned with them as such.

5. Welfare Definition & Classificatory and Not Analytical:

Robbins criticizes the material welfare defini­tions as being classificatory rather than analytical. These definitions deal with certain kinds of human behaviour—those directed towards the procurement of material welfare.

But other kinds of activities concerned with a particular aspect of human behaviour lie outside the jurisdiction of economics. Whereas the neo­classical described certain activities being “economic” and “non-economic”, Robbins finds no valid reason for making this distinction as every human activity has an economic aspect when it is undertaken under the influence of scarcity.

6. Economics not a Social Science but a Human Science:

Robbins does not agree with Marshall that economics is a social science— “a study of men as they live and move and think in the ordinary business of life.” Rather he regards economics as a human science. Economics is as much concerned with an exchange economy as with a Robinson Crusoe economy. The central problem in economics, according to Robbins, is that of valuation which is one of allocation of scarce means among alternative ends.

Since the generalisations of the theory of value are as applicable to the behaviour of an isolated man or to the executive authority of a communist society, as to the behaviour of man in an exchange economy. Therefore, economics should be regarded as a human science.

Essay # The Classical View of Adam Smith :

The classical economists beginning with Adam Smith defined economics as the science of wealth. Adam Smith defined it as the “nature and causes of wealth of nations,” whereby it “proposes to enrich both the people and the sovereign.”

Among his followers, J.B. Say in France defined economics as “the study of the laws which govern wealth;” to Nassau Senior at Oxford, “the subject treated by political economists…is not happiness, but wealth;” whereas to F.A. Walker in America, “Economics is that body of knowledge which relates to wealth.”

According to J.S. Mill, “Writers on Political Economy profess to teach the nature of wealth and the laws which govern its production, distribution and exchange.” To J.E. Cairnes, “Political Economy is a science…it deals with the phenomena of wealth.” While B. Price declared in 1878 that “all are agreed that it is concerned with wealth.”

Its Criticisms :

The classical view was misleading and had serious defects. This conception of economics as a science of wealth laid exclusive stress on material wealth. Following Smith and Say, the Earl of Lauderdale (1804) and McCulloch (1827) regarded economics as related to material wealth, wealth being “the object of man’s desires.”

In an age when religious sentiments ran high, this conception of economics was interpreted as concerning only the acquisition of riches or money. This led economics to be branded as the science of Mormonism, of bread and butter, a dismal science, the science of getting rich.

Bailey called it “a mean, degrading, sordid inquiry.” To Carlyle it was a “pig-science.” Ruskin lamented in the Preface to his Unto the Last that economists were in “an entirely damned state of soul.” Even economists like Jevons and Edge worth were despaired of this wealth-oriented conception of economics. Edge worth regarded it as “dealing with the lower elements of human nature.”

The main drawback in wealth definition of economics had been its undue emphasis on wealth-producing activities. Wealth was considered to be an end in itself. Moreover, as pointed out by Macfie the “fatal word ‘material’ is probably more responsible for the ignorant slanders on the ‘dismal science’ than any other description.”

By stressing on the word ‘material wealth’ the classical economists narrowed the scope of economics by excluding all economic activities which are related to the production of non-material goods and services, such as of doctors, teachers, etc.

Essay # Basic Concepts of Economics:

Ordinarily, the concept of value is related to the concept of utility. Utility is the want satisfying quality of a thing when we use or consume it. Thus utility is the value-in-use of a commodity. For instance, water quenches our thirst. When we use water to quench our thirst, it is the value-in-use of water.

In economics, value means the power that goods and services have to exchange other goods and services, i.e. value-in-exchange. If one pen can be exchanged for two pencils, then the value of one pen is equal to two pencils. For a commodity to have value, it must possess the following three characteristics.

a. Utility:

It should have utility. A rotten egg has no utility because it cannot be exchanged for anything. It possesses no value-in-exchange.

b. Scarcity:

Mere utility does not create value unless it is scarce. A good or service is scarce (limited) in relation to its demand. All economic goods like pen, book, etc. are scarce and have value. But free goods like air do not possess value. Thus goods possessing the quality of scarcity have value.

c. Transferability:

Besides the above two characteristics, a good should be transferable from one place to another or from one person to another. Thus a commodity to have value-in-exchange must possess the qualities of utility, scarcity and transferability.

2. Value and Price :

In common language, the terms ‘value’ and ‘price’ are used as synonyms (i.e. the same). But in economics, the meaning of price is different from that of value. Price is value expressed in terms of money. Value is expressed in terms of other goods. If one pen is equal to two pencils and one pen can be had for Rs.10. Then the price of one pen is Rs.10 and the price of one pencil is Rs.5.

Value is a relative concept in comparison to the concept of price. It means that there cannot be a general rise or fall in values, but there can be a general rise or fall in prices. Suppose 1 pen = 2 pencils. If the value of pen increases it means that one pen can buy more pencils in exchange.

Let it be 1 pen= 4 pencils. It means that the value of pencils has fallen. So when the value of one commodity raises that of the other good in exchange falls. Thus there cannot be a general rise or fall in values. On the other hand, when prices of goods start rising or falling, they rise or fall together.

It is another thing that prices of some goods may rise or fall slowly or swiftly than others. Thus there can be a general rise or fall in prices.

3. Wealth :

In common use, the term ‘wealth’ means money, property, gold, etc. But in economics it is used to describe all things that have value. For a commodity to be called wealth, it must prossess utility, scarcity and transferability. If it lacks even one quality, it cannot be termed as wealth.

Forms of Wealth:

Wealth may be of the following types:

1. Individual Wealth:

Wealth owned by an individual is called private or individual wealth such as a car, house, company, etc.

2. Social Wealth:

Goods which are owned by the society are called social or collective wealth, such as schools, colleges, roads, canals, mines, forests, etc.

3. National or Real Wealth:

National wealth includes all individual and social wealth. It consists of material assets possessed by the society. National wealth is real wealth.

4. International Wealth:

The United Nations Organisation and its various agencies like the World Bank, IMF, WHO, etc. are international wealth because all countries contribute towards their operations.

5. Financial Wealth:

Financial wealth is the holding of money, stocks, bonds, etc. by individuals in the society. Financial wealth is excluded from national wealth. This is because money, stocks, bonds, etc. which individuals hold as wealth are claims against one another.

Some differences :

Wealth is different from capital, income and money.

Wealth and Capital:

Goods which have value are termed as wealth. But capital is that part of wealth which is used for further production of wealth. Furniture used in the home is wealth but given on rent is capital. Thus all capital is wealth but all wealth is not capital.

Wealth and Income:

Wealth is a stock and income is a flow. Income is the earning from wealth. The shares of a company are wealth but the dividend received on them is income.

Wealth and Money:

Money consists of coins and currency notes. Money is the liquid form of wealth. All money is wealth but all wealth is not money.

4. Stocks and Flows :

Distinction may be made here between a stock variable and a flow variable. A stock variable has no time dimension. Its value is ascertained at some point in time. A stock variable does not involve the specification of any particular length of time. On the other hand, a flow variable has a time dimension. It is related to a specified period of time.

So national income is a flow and national wealth is a stock. Change in any variable which can be measured over a period of time relates to a flow. In this sense, in ventories are stocks but change in inventories in a flow.

A number of other examples of stocks and flows can also be given. Money is a stock but the spending of money is flow. Government debt is stock. Saving and investment and operating surplus during a year are flows but if they relate to the past year, they are stocks.

But certain variables are only in the form of flows such as NNP, NDP, value added, dividends, tax payments, imports, exports, net foreign investment, social security benefits, wages and salaries, etc.

5. Optimisation :

Optimisation means the most efficient use of resources subject to certain constraints it is the choice from all possible uses of resources which gives the best results, it is the task of maximisation or minimisation of an objective function it is a technique which is used by a consumer and a producer as decision-maker.

A consumer wants to buy the best combination of a consumer good when his objective function is to maximise his utility, given his fixed income as the constraints. Similarly, a producer wants to produce the most suitable level of output to maximise his profit, given the raw materials, capital, etc. as constraints.

As against this, a firm cans hence the objective of minimisation of its cost of production by choosing the best combination of factors of production, given the manpower resources, capital, etc. as constraints. Thus optimisation is the determination of the maximisation or minimisation of an objective function.

Essay # Types of Goods in Economics:

1. material and non-material goods:.

Goods may be material and non-material. Material goods are those which are tangible. They can be seen, touched and transferred from one place to another. For example, cars, shoes, cloth, machines, buildings, wheat, etc., are all material goods.

On the other hand, non-material goods are intangible for they do not possess any shape or weight and cannot be seen, touched or transferred. Services of all types are non-material goods such as those of doctors, engineers, actors, lawyers, teachers, etc. The characteristics common to both material and non-material goods are that they have value and satisfy human wants.

Economic and Non-economic Goods:

Material goods are further divided into economic and non-economic goods. Economic goods are those which have a price and their supply is less in relation to their demand or is scarce. The production of such goods requires scarce resources having alternative uses. For example, land is scarce and is capable of producing rice or sugarcane.

If the farmer wants to produce rice he will have to forgo the production of sugarcane. The price of rice equals the production of sugarcane forgone by the farmer. Thus economic goods relate to the problem of economizing scarce resources for the satisfaction of human wants. In this sense, all material goods are economic goods.

Non-economic goods are called free goods because they are free gifts of nature. They do not have any price and are unlimited in supply. Examples of non-economic goods are air, water, sunshine, etc. The concept of non-economic goods is relative to place and time. Sand lying near the river is a free good but when it is collected in a truck and carried to the town for house construction, it becomes an economic good.

It is now scarce in relation to its demand and fetches a price. There was a time when water could be had free from the wells and rivers. Now when it is stored and pumped through pipes to houses it is sold at a price to consumers.

Thus what is a free good today may become an economic good with technological advancement. For example, air which is a free good becomes an economic good when we install air conditioners, room coolers and fans.

Consumers’ Goods and Producers’ goods:

Economics goods are further divided into consumers’ goods and producers’ goods.

1. Consumers’ Goods:

Consumers’ goods are those final goods which directly satisfy the wants of consumers. Such goods are bread, milk, pen, clothes, furniture, etc. Consumers’ goods are further sub-divided into single-use consumers’ goods and durable use consumers’ goods.

(a) Single-use Consumers’ Goods:

These are goods which are used up in a single act of consumption. Such goods are foodstuffs, cigarettes, matches, fuel, etc. They are the articles of direct consumption because they satisfy human want directly. Similarly, the services of all types such as those of doctors, actors, lawyers, waiters, etc. are included under single use goods.

(b) Durable-use Consumers’ Goods:

These goods can be used for a considerable period of time. It is immaterial whether the period is short or long. Such goods are pens, tooth brushes, clothes, scooters, TV sets, etc.

2. Capital or Producers’ Goods:

Capital goods are those goods which help in the production of other goods that satisfy the wants of the consumers directly or indirectly, such as machines, plants, agricultural and industrial raw materials, etc. Producers’ goods are also classified into single-use producers’ goods and durable- use producers’ goods.

(a) Single-use Producers’ Goods:

Theses goods are used up in a single act of production. Such goods are raw cotton, coal used in factories, paper used for printing books, etc. When once used, these goods lose their original shape.

(b) Durable-use Producers’ Goods:

These goods can be used time and again. They do not lose their usability through a single use but are used over a long period of time. Capital goods of all types such as machines, plants, factory buildings, tools, implements, tractors, etc. are examples of durable-use producers’ goods.

The distinction between consumers’ goods and capital goods is based on the uses to which these goods are put. There are many goods such as electricity, coal, etc. which are used both as consumers’ goods and capital goods.

The distinction between single-use goods and durable-use goods has great significance from the point of the economy. The demand for single-use goods is more regular and steady over time and can be predicted in advance.

On the other hand, the demand for durable-use goods is irregular and uncertain. It takes much longer time to adjust supply to changes in demand in the case of such goods. This is partly the cause for trade cycles in an economy which produces durable-use goods in large quantities.

2. Intermediate Goods:

Goods sold by one firm to another for resale or for further production are called intermediate goods. They are single-use producers’ goods that are transformed to manufacture final goods. Intermediate goods are also termed as inputs.

Cotton from the fields is sold to the spinning mill where it is transformed into yarn. In turn, the yarn leaves the spinning mill by way of sale to the textile mill where it disappears into a new product, cloth. Again, cloth is sold by the mill to the trader to be sold as final goods.

3. Final Goods:

On the other hand, goods sold not for resale or for further production but for personal consumption or for investment are called final goods. On the basis of this definition, a particular good or service may be classified intermediate good or final good.

For instance, the water sold by the municipal corporation to commercial and industrial undertaking is an intermediate good because it is used by them for further production.

On the other hand, the water sold to individual households is final good because it is used for personal consumption. Similarly, the postal services sold to business houses are intermediate goods and those to households are final goods.

Thus the services of government enterprises and of non-profit institutions should be classified as intermediate or final goods according to the definition given above. What these enterprises and institutions purchase from firms are intermediate goods because they are used in the services they render to final consumers.

When the government buys cement, steel and other raw materials to build roads and bridges, consumers use the services of the roads and bridges which are final goods. The distinction between intermediate and final goods is of much importance in the computation of national income. It is especially so while computing national income by the product method or value added method.

Essay # Utility in Economics:

Meaning of utility:.

The want satisfying power of a commodity is called utility. It is a quality possessed by a commodity or service to satisfy human wants. Utility can also be defined as value-in-use of a commodity because the satisfaction which we get from the consumption of a commodity is its value-in-use.

Types of Utility :

Utility may take any of the following forms:

(1) Form Utility:

When utility is created and or added by changing the shape or form of goods, it is form utility. When a carpenter makes a table out of wood, he adds to the utility of wood by converting it into a more useful commodity like furniture. He has created form utility.

(2) Place Utility:

When the furniture is taken from the factory to the shop for sale, it leads to place utility. This is because it is transported from a place where it has no buyers to a place where it fetches a price.

(3) Time Utility:

When a farmer stores his wheat after harvesting for a few months and sells it when its price rises, he has created time utility and added to the value of wheat.

(4) Service Utility:

When doctors, teachers, lawyers, engineers, etc. satisfy human wants through their services, they create service utility. It is acquired through specialised knowledge and skills.

(5) Possession Utility:

Utility is also added by changing the possession of a commodity. A book on economic theory has little utility for a layman. But if it is owned by a student of economics, possession utility is created.

(6) Knowledge Utility:

When the utility of a commodity increases with the increase in knowledge about its use, it is the creation of knowledge utility through propaganda, advertisement, etc.

(7) Natural Utility:

All free goods such as water, air, sunshine, etc., possess natural utility. They have the capacity to satisfy our wants.

Characteristics of Utility :

The following are the characteristics of utility:

1. Utility and Usefulness:

Anything having utility does not mean that it is also useful. If a good possesses want satisfying power, it has utility. But the consumption of that good may be ‘useful’ or ‘harmful’. For example, the consumption of wine possesses utility for a man habitual to drinking because it satisfies his want to drink. But the use of wine is harmful for health, but it has utility. Thus utility is not usefulness.

2. Utility and Satisfaction:

Utility is the quality or power of a commodity to satisfy human wants, whereas satisfaction is the result of utility. Apples lying in the shop of a fruit seller have utility for us, but we get satisfaction only when we purchase and consume them. It means utility is present even before the actual consumption of a commodity and satisfaction is obtained only after its consumption. Utility is the cause and satisfaction is the effect or result.

3. Utility and Pleasure:

It is not necessary that a commodity processing utility also gives pleasure when we consume it. Utility is free from pain or pleasure. An injection possesses utility for a patient, because it can relieve him of his illness. But injection gives him no pleasure; instead it gives him some pain. Quinine is bitter in taste but it has the utility to treat the patient from malaria. So, there is no relationship between utility and pleasure.

4. Utility is Subjective:

Utility is a subjective and psychological concept. It means utility of a commodity differs from person to person. Opium is of great utility for a man accustomed to opium, but it has no utility for a man who is not accustomed to opium. In the same manner, utility of different commodities differs from person to person. Therefore, utility is subjective.

5. Utility is Relative:

Utility is a relative concept. A commodity may possess different utility at different times or at different places or for different persons. In olden days, a Tonga had greater utility. But now with the invention of bus, its utility has become less. A rain coat has greater utility in hilly areas during rainy season than in plain areas. A fan has greater utility in summer than in winter.

6. Utility is Abstract:

Utility is abstract which cannot be seen with eyes, or touched or felt with hands. For example, the argumentative power of an advocate is abstract. Similarly, utility is abstract. Utility of a commodity can neither be seen not touched or felt with hands.

Measurement of Utility :

According to Marshall, the utility of a commodity can be measured in terms of money. If a consumer is willing to pay Rs.2 for an orange and Re 1 for a banana, then the utility of an orange is equal to Rs.2 and that of a banana is Re. 1 to him.

It means that the utility of one orange is equal to 2 bananas. In other words, the utility of an orange to the consumer is twice that of the banana. But this analysis does not hold when there are two different consumers offering two different prices for the same commodity.

Suppose Bhanu offers Rs.2 for a banana for which Gautam is prepared to pay Re. 1.The higher price paid by Bhanu does not mean that he gets more utility and Gautam less utility. Thus money does not measure the utility from a commodity. It simply measures the intensity of our desire for a commodity. Despite this weakness, money is used as a measure of utility.

Cardinal and Ordinal Utility:

The terms ‘cardinal’ and ‘ordinal’ have been borrowed from mathematics. The numbers 1, 2, 3, 4, etc. are cardinal numbers. According to the cardinal system, the utility of a commodity is measured in units and that utility can be added, subtracted and compared.

For example, if the utility of one apple is 10 units, of banana 20 units and of orange 40 units, the utility of banana are double that of apple and of orange four times the apple and twice the banana.

The ordinal numbers are 1st, 2nd, 3rd, 4th, etc. which may stand for 1, 2, 4, 6 or 30, 40, 60, 80, etc. They tell us that the consumer prefers the first to the second and the third to the second and first, and so on. But they cannot tell by how much he prefers one to the other.

The entire Marshallian utility analysis is based on the cardinal measurement of utility. According to Hicks, utility cannot be measured cardinally because utility which a commodity possesses is subjective and psychological. He, therefore, rejects the quantitative measurement of utility and measures utility ordinally in terms of the indifference curve technique.

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Desalination: What is it and how can it help tackle water scarcity?

Cupped hands catching water. Caption: A natural resources crisis like water scarcity is listed in the World Economic Forum’s Global Risks Report 2024, as one of the top-10 threats facing the world in the next decade.

A natural resources crisis like water scarcity is listed in the World Economic Forum’s 2024 Global Risks Report, as one of the top-10 threats facing the world in the next decade. Image:  Unsplash/Nathan Dumlao

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economics essay on scarcity

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Stay up to date:, food and water.

  • Desalination increases access to safe, clean drinking water, but the process is energy-intensive and costly.
  • New innovations are turning to wave power and other ways to reduce reliance on fossil fuels and curb emissions from desalination.
  • A natural resources crisis is one of the leading global long-term threats, according to the World Economic Forum’s 2024 Global Risks Report.

Billions of people turn on a tap and expect clean drinking water to flow out, but this is not their reality for billions of others.

Rapid population growth, burgeoning urbanization, and increased global water consumption by agriculture, industry, and energy have left a growing number of countries facing the threat of water scarcity.

One solution to meet the growing demand for freshwater is desalination, which involves removing the salt from seawater to produce drinking water. While this process alone can’t prevent a global water crisis, it can play a vital role in providing more people around the world with access to clean, safe drinking water.

Have you read?

25 countries face extremely high water stress, study finds, this new desalination system is inspired by the ocean and powered by the sun, how technology and entrepreneurship can quench our parched world, a future water crisis.

Water scarcity occurs when water demand outstrips available supply during a specific period – when water infrastructure is inadequate or institutions fail to balance people’s needs.

In 2022, 2.2 billion people lacked safely managed drinking water, including more than 700 million people living without a basic water service , according to the United Nations.

By 2030, there could be a 40% global shortfall in freshwater resources, which combined with world population growth that’s set to increase from 8 billion today to 9.7 billion by 2050 , would leave the world facing an extreme water crisis.

Percentage change in water demand compared to 2019.

Sub-Saharan Africa is expected to see the biggest change in water demand, with a projected 163% increase by mid-century, World Resources Institute data shows. This is four times the expected rate of change in Latin America, the second-highest region.

Almost two-thirds of the planet’s surface is covered with water, and our oceans hold 96.5% of all water on Earth . However, its salt content makes this water unsuitable for humans to drink. This is where desalination comes in.

Where is Earth's water?

Types of desalination

There are a number of different methods of desalination, but most work either by a process of reverse osmosis or multistage flash to remove the salt from seawater .

Reverse osmosis is the more efficient of these two methods. The process uses a special membrane acting as a filter, which blocks and removes salt from seawater as it passes through. Here, powerful pumps generate enough pressure to ensure pure water is extracted.

Multistage flash desalination doesn't use a filter. Instead, saltwater is exposed to steam heat and pressure variations, which causes a portion of the water to evaporate – or "flash" – into water vapour or freshwater, leaving behind salty brine as a by-product.

Water security – both sustainable supply and clean quality – is a critical aspect in ensuring healthy communities. Yet, our world’s water resources are being compromised.

Today, 80% of our wastewater flows untreated back into the environment, while 780 million people still do not have access to an improved water source. By 2030, we may face a 40% global gap between water supply and demand.

The World Economic Forum’s Water Possible Platform is supporting innovative ideas to address the global water challenge.

The Forum supports innovative multi-stakeholder partnerships including the 2030 Water Resources Group , which helps close the gap between global water demand and supply by 2030 and has since helped facilitate $1Billion of investments into water.

Other emerging partnerships include the 50L Home Coalition , which aims to solve the urban water crisis , tackling both water security and climate change; and the Mobilizing Hand Hygiene for All Initiative , formed in response to close the 40% gap of the global population not having access to handwashing services during COVID-19.

Want to join our mission to address the global water challenge? Read more in our impact story .

Both desalination processes create brine containing high salt levels, which can pose a threat to marine ecosystems when released back into natural bodies of water. The output of both methods is clean drinking water. In addition to salt, the desalination process also removes organic or biological chemical compounds so the water produced doesn’t transmit diarrhoea or other diseases.

A natural resource crisis is seen as a top-5 global risk in the long term.

Wave-powered innovation

While reverse osmosis plants are more efficient than multistage flash plants, large-scale desalination plants require a lot of energy and maintenance and are expensive to build and operate.

A number of innovative desalination systems are being developed to try and reduce the energy required to operate them and related emissions.

One desalination innovation called Oneka is powered by waves. Special buoys are attached to the ocean floor so they can float on the surface, using wave power to drive a pump that forces seawater through filters and reverse osmosis membranes. The fresh water is then piped ashore again powered solely by the natural motion of waves.

The system has several advantages over large-scale shore-based desalination plants that are mostly powered by combusting fossil fuels, however, it does require high waves to work.

The small floating units require 90% less coastal land compared with a typical desalination plant, for example. Relying on emissions-free wave power rather than electricity demands less energy and generates fewer emissions than traditional desalination plants.

" Desalination facilities are conventionally powered by fossil fuels ," Susan Hunt, chief innovation officer at Oneka told the BBC.

"But the world has certainly reached a pivot point. We want to move away from fossil fuel-powered desalination," she said.

A natural resources crisis like water scarcity is listed in the World Economic Forum’s Global Risks Report 2024 , as one of the top-10 threats facing the world in the next decade.

Currently, desalination plants are used in regions like the Middle East, which has a hot climate alongside a buoyant and technologically able economy. But the energy-intensive nature and high costs of conventional desalination plants act as barriers to widespread take-up.

However, innovations that reduce the energy needed to operate desalination plants and reduce greenhouse emissions from their operations could change the situation and increase access to fresh drinking water for communities facing water challenges.

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World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

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Happiness: A scarcity that’ll take long to eliminate

Studies have repeatedly shown that while the rich are generally happier than others, wealth and prosperity are no guarantee of happiness.

  • That the UN deemed happiness worthy of celebration tells us how elusive it is for most of the world. After all, economic well-being is a necessary but not sufficient condition for it.

There’s another International Day on its way: 20 March. It’s marked on the calendar as the Day of Happiness. In an increasingly polarized world that looks set to become more so as political divisions deepen, where two major wars are raging, one in its third year and the other with no end in sight, and where not a single day goes by without countless acts of violence, celebrating an International Day of Happiness sounds absurdly Panglossian. True happiness, after all, is a pipe-dream. But can it become an ideal that all of us can aspire to, no matter how out of reach it may seem for most of humankind today? Perhaps. This was what led the United Nations General Assembly to pass a resolution 12 years ago marking 20 March out for annual commemoration.

The UN website describes ‘happiness’ as a fundamental human goal. And in recognition of the right to be happy, it calls for “a more inclusive, equitable and balanced approach to economic growth that promotes the happiness and well-being of all peoples." Ah, so there you have it: Happiness is not entirely surreal. It is closely linked with economic well-being. But if you think being well-off alone ensures happiness, perish the thought. Studies have repeatedly shown that while the rich are generally happier than others, wealth and prosperity are no guarantee of happiness. Else, the world’s richest large country, the US, would also be its happiest. Instead, the UN’s 2023 World Happiness Report, published on 20 March last year, ranks the US a relatively low 15th. In contrast, the Nordic countries—Finland, Denmark, Iceland, Sweden and Norway—rank consistently among the top 10, with Finland leading from the front for the sixth successive year. So, is there some magic potion these countries have that others don’t? Far from it. “The effectiveness of the government has a major influence on human happiness," says the report, stating the obvious. Despite the triumph of free-market capitalism in the late 20th century, the reality is governments have an unduly large influence over our lives. The report identifies five government traits that have a close relationship with people’s well-being: its ability to raise money, ability to deliver services, the rule of law, avoidance of civil war and avoidance of repression. And it is immediately clear why Nordic countries do so well. Their willingness and capacity to keep the welfare of citizens foremost is legion. As is the trust of citizens in their government.

Of course, any attempt to construct an index of happiness—which is, after all, a state of mind—is bound to suffer from the usual drawbacks of subjectivity and inherent biases. Israel, for instance, ranks among the top 10, though it is often at war. Even so, it is disconcerting to find India ranked among the world’s lowest. Our rank, 126th out of 136 countries, below the likes of China (No. 64), hardly a bastion of civic freedoms, and Palestine (No. 98), an embattled if not still-born state, does us no justice. Sure, it will be a while before state capacity and civil society in India match their Nordic counterparts. But the economic underpinning of happiness means our steady ascent of the global league tables for GDP (we rank fifth) and market capitalization (we’re fourth) should see us perform better on the happiness index as well. To get there, though, we must remember that economic well-being is a necessary but not sufficient condition for happiness.

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The Philippines economy in 2024: Stronger for longer?

The Philippines ended 2023 on a high note, being the fastest growing economy across Southeast Asia with a growth rate of 5.6 percent—just shy of the government's target of 6.0 to 7.0 percent. 1 “National accounts,” Philippine Statistics Authority, January 31, 2024; "Philippine economic updates,” Bangko Sentral ng Pilipinas, November 16, 2023. Should projections hold, the Philippines is expected to, once again, show significant growth in 2024, demonstrating its resilience despite various global economic pressures (Exhibit 1). 2 “Economic forecast 2024,” International Monetary Fund, November 1, 2023; McKinsey analysis.

The growth in the Philippine economy in 2023 was driven by a resumption in commercial activities, public infrastructure spending, and growth in digital financial services. Most sectors grew, with transportation and storage (13 percent), construction (9 percent), and financial services (9 percent), performing the best (Exhibit 2). 3 “National accounts,” Philippine Statistics Authority, January 31, 2024. While the country's trade deficit narrowed in 2023, it remains elevated at $52 billion due to slowing global demand and geopolitical uncertainties. 4 “Highlights of the Philippine export and import statistics,” Philippine Statistics Authority, January 28, 2024. Looking ahead to 2024, the current economic forecast for the Philippines projects a GDP growth of between 5 and 6 percent.

Inflation rates are expected to temper between 3.2 and 3.6 percent in 2024 after ending 2023 at 6.0 percent, above the 2.0 to 4.0 percent target range set by the government. 5 “Nomura downgrades Philippine 2024 growth forecast,” Nomura, September 11, 2023; “IMF raises Philippine growth rate forecast,” International Monetary Fund, July 16, 2023.

For the purposes of this article, most of the statistics used for our analysis have come from a common thread of sources. These include the Central Bank of the Philippines (Bangko Sentral ng Pilipinas); the Department of Energy Philippines; the IT and Business Process Association of the Philippines (IBPAP); and the Philippines Statistics Authority.

The state of the Philippine economy across seven major sectors and themes

In the article, we explore the 2024 outlook for seven key sectors and themes, what may affect each of them in the coming year, and what could potentially unlock continued growth.

Financial services

The recovery of the financial services sector appears on track as year-on-year growth rates stabilize. 6 Philippines Statistics Authority, November 2023; McKinsey in partnership with Oxford Economics, November 2023. In 2024, this sector will likely continue to grow, though at a slower pace of about 5 percent.

Financial inclusion and digitalization are contributing to growth in this sector in 2024, even if new challenges emerge. Various factors are expected to impact this sector:

  • Inclusive finance: Bangko Sentral ng Pilipinas continues to invest in financial inclusion initiatives. For example, basic deposit accounts (BDAs) reached $22 million in 2023 and banking penetration improved, with the proportion of adults with formal bank accounts increasing from 29 percent in 2019 to 56 percent in 2021. 7 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024.
  • Digital adoption: Digital channels are expected to continue to grow, with data showing that 60 percent of adults who have a mobile phone and internet access have done a digital financial transaction. 8 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024. Businesses in this sector, however, will need to remain vigilant in navigating cybersecurity and fraud risks.
  • Unsecured lending growth: Growth in unsecured lending is expected to continue, but at a slower pace than the past two to three years. For example, unsecured retail lending for the banking system alone grew by 27 percent annually from 2020 to 2022. 9 “Loan accounts: As of first quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024; "Global banking pools,” McKinsey, November 2023. Businesses in this field are, however, expected to recalibrate their risk profiling models as segments with high nonperforming loans emerge.
  • High interest rates: Key interest rates are expected to decline in the second half of 2024, creating more accommodating borrowing conditions that could boost wholesale and corporate loans.

Supportive frameworks have a pivotal role to play in unlocking growth in this sector to meet the ever-increasing demand from the financially underserved. For example, financial literacy programs and easier-to-access accounts—such as BDAs—are some measures that can help widen market access to financial services. Continued efforts are being made to build an open finance framework that could serve the needs of the unbanked population, as well as a unified credit scoring mechanism to increase the ability of historically under-financed segments, such as small and medium-sized enterprises (SMEs), to access formal credit. 10 “BSP launches credit scoring model,” Bangko Sentral ng Pilipinas, April 26, 2023.

Energy and Power

The outlook for the energy sector seems positive, with the potential to grow by 7 percent in 2024 as the country focuses on renewable energy generation. 11 McKinsey analysis based on input from industry experts. Currently, stakeholders are focused on increasing energy security, particularly on importing liquefied natural gas (LNG) to meet power plants’ requirements as production in one of the country’s main sources of natural gas, the Malampaya gas field, declines. 12 Myrna M. Velasco, “Malampaya gas field prod’n declines steeply in 2021,” Manila Bulletin , July 9, 2022. High global inflation and the fact that the Philippines is a net fuel importer are impacting electricity prices and the build-out of planned renewable energy projects. Recent regulatory moves to remove foreign ownership limits on exploration, development, and utilization of renewable energy resources could possibly accelerate growth in the country’s energy and power sector. 13 “RA 11659,” Department of Energy Philippines, June 8, 2023.

Gas, renewables, and transmission are potential growth drivers for the sector. Upgrading power grids so that they become more flexible and better able to cope with the intermittent electricity supply that comes with renewables will be critical as the sector pivots toward renewable energy. A recent coal moratorium may position natural gas as a transition fuel—this could stimulate exploration and production investments for new, indigenous natural gas fields, gas pipeline infrastructure, and LNG import terminal projects. 14 Philippine energy plan 2020–2040, Department of Energy Philippines, June 10, 2022; Power development plan 2020–2040 , Department of Energy Philippines, 2021. The increasing momentum of green energy auctions could facilitate the development of renewables at scale, as the country targets 35 percent share of renewables by 2030. 15 Power development plan 2020–2040 , 2022.

Growth in the healthcare industry may slow to 2.8 percent in 2024, while pharmaceuticals manufacturing is expected to rebound with 5.2 percent growth in 2024. 16 McKinsey analysis in partnership with Oxford Economics.

Healthcare demand could grow, although the quality of care may be strained as the health worker shortage is projected to increase over the next five years. 17 McKinsey analysis. The supply-and-demand gap in nursing alone is forecast to reach a shortage of approximately 90,000 nurses by 2028. 18 McKinsey analysis. Another compounding factor straining healthcare is the higher than anticipated benefit utilization and rising healthcare costs, which, while helping to meet people's healthcare budgets, may continue to drive down profitability for health insurers.

Meanwhile, pharmaceutical companies are feeling varying effects of people becoming increasingly health conscious. Consumers are using more over the counter (OTC) medication and placing more beneficial value on organic health products, such as vitamins and supplements made from natural ingredients, which could impact demand for prescription drugs. 19 “Consumer health in the Philippines 2023,” Euromonitor, October 2023.

Businesses operating in this field may end up benefiting from universal healthcare policies. If initiatives are implemented that integrate healthcare systems, rationalize copayments, attract and retain talent, and incentivize investments, they could potentially help to strengthen healthcare provision and quality.

Businesses may also need to navigate an increasingly complex landscape of diverse health needs, digitization, and price controls. Digital and data transformations are being seen to facilitate improvements in healthcare delivery and access, with leading digital health apps getting more than one million downloads. 20 Google Play Store, September 27, 2023. Digitization may create an opportunity to develop healthcare ecosystems that unify touchpoints along the patient journey and provide offline-to-online care, as well as potentially realizing cost efficiencies.

Consumer and retail

Growth in the retail and wholesale trade and consumer goods sectors is projected to remain stable in 2024, at 4 percent and 5 percent, respectively.

Inflation, however, continues to put consumers under pressure. While inflation rates may fall—predicted to reach 4 percent in 2024—commodity prices may still remain elevated in the near term, a top concern for Filipinos. 21 “IMF raises Philippine growth forecast,” July 26, 2023; “Nomura downgrades Philippines 2024 growth forecast,” September 11, 2023. In response to challenging economic conditions, 92 percent of consumers have changed their shopping behaviors, and approximately 50 percent indicate that they are switching brands or retail providers in seek of promotions and better prices. 22 “Philippines consumer pulse survey, 2023,” McKinsey, November 2023.

Online shopping has become entrenched in Filipino consumers, as they find that they get access to a wider range of products, can compare prices more easily, and can shop with more convenience. For example, a McKinsey Philippines consumer sentiment survey in 2023 found that 80 percent of respondents, on average, use online and omnichannel to purchase footwear, toys, baby supplies, apparel, and accessories. To capture the opportunity that this shift in Filipino consumer preferences brings and to unlock growth in this sector, retail organizations could turn to omnichannel strategies to seamlessly integrate online and offline channels. Businesses may need to explore investments that increase resilience across the supply chain, alongside researching and developing new products that serve emerging consumer preferences, such as that for natural ingredients and sustainable sources.

Manufacturing

Manufacturing is a key contributor to the Philippine economy, contributing approximately 19 percent of GDP in 2022, employing about 7 percent of the country’s labor force, and growing in line with GDP at approximately 6 percent between 2023 and 2024. 23 McKinsey analysis based on input from industry experts.

Some changes could be seen in 2024 that might affect the sector moving forward. The focus toward building resilient supply chains and increasing self-sufficiency is growing. The Philippines also is likely to benefit from increasing regional trade, as well as the emerging trend of nearshoring or onshoring as countries seek to make their supply chains more resilient. With semiconductors driving approximately 45 percent of Philippine exports, the transfer of knowledge and technology, as well as the development of STEM capabilities, could help attract investments into the sector and increase the relevance of the country as a manufacturing hub. 24 McKinsey analysis based on input from industry experts.

To secure growth, public and private sector support could bolster investments in R&D and upskill the labor force. In addition, strategies to attract investment may be integral to the further development of supply chain infrastructure and manufacturing bases. Government programs to enable digital transformation and R&D, along with a strategic approach to upskilling the labor force, could help boost industry innovation in line with Industry 4.0 demand. 25 Industry 4.0 is also referred to as the Fourth Industrial Revolution. Priority products to which manufacturing industries could pivot include more complex, higher value chain electronic components in the semiconductor segment; generic OTC drugs and nature-based pharmaceuticals in the pharmaceutical sector; and, for green industries, products such as EVs, batteries, solar panels, and biomass production.

Information technology business process outsourcing

The information technology business process outsourcing (IT-BPO) sector is on track to reach its long-term targets, with $38 billion in forecast revenues in 2024. 26 Khriscielle Yalao, “WHF flexibility key to achieving growth targets—IBPAP,” Manila Bulletin , January 23, 2024. Emerging innovations in service delivery and work models are being observed, which could drive further growth in the sector.

The industry continues to outperform headcount and revenue targets, shaping its position as a country leader for employment and services. 27 McKinsey analysis based in input from industry experts. Demand from global companies for offshoring is expected to increase, due to cost containment strategies and preference for Philippine IT-BPO providers. New work setups continue to emerge, ranging from remote-first to office-first, which could translate to potential net benefits. These include a 10 to 30 percent increase in employee retention; a three- to four-hour reduction in commute times; an increase in enabled talent of 350,000; and a potential reduction in greenhouse gas emissions of 1.4 to 1.5 million tons of CO 2 per year. 28 McKinsey analysis based in input from industry experts. It is becoming increasingly more important that the IT-BPO sector adapts to new technologies as businesses begin to harness automation and generative AI (gen AI) to unlock productivity.

Talent and technology are clear areas where growth in this sector can be unlocked. The growing complexity of offshoring requirements necessitates building a proper talent hub to help bridge employee gaps and better match local talent to employers’ needs. Businesses in the industry could explore developing facilities and digital infrastructure to enable industry expansion outside the metros, especially in future “digital cities” nationwide. Introducing new service areas could capture latent demand from existing clients with evolving needs as well as unserved clients. BPO centers could explore the potential of offering higher-value services by cultivating technology-focused capabilities, such as using gen AI to unlock revenue, deliver sales excellence, and reduce general administrative costs.

Sustainability

The Philippines is considered to be the fourth most vulnerable country to climate change in the world as, due to its geographic location, the country has a higher risk of exposure to natural disasters, such as rising sea levels. 29 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021. Approximately $3.2 billion, on average, in economic loss could occur annually because of natural disasters over the next five decades, translating to up to 7 to 8 percent of the country’s nominal GDP. 30 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021.

The Philippines could capitalize on five green growth opportunities to operate in global value chains and catalyze growth for the nation:

  • Renewable energy: The country could aim to generate 50 percent of its energy from renewables by 2040, building on its high renewable energy potential and the declining cost of producing renewable energy.
  • Solar photovoltaic (PV) manufacturing: More than a twofold increase in annual output from 2023 to 2030 could be achieved, enabled by lower production costs.
  • Battery production: The Philippines could aim for a $1.5 billion domestic market by 2030, capitalizing on its vast nickel reserves (the second largest globally). 31 “MineSpans,” McKinsey, November 2023.
  • Electric mobility: Electric vehicles could account for 15 percent of the country’s vehicle sales by 2030 (from less than 1 percent currently), driven by incentives, local distribution, and charging infrastructure. 32 McKinsey analysis based on input from industry experts.
  • Nature-based solutions: The country’s largely untapped total abatement potential could reach up to 200 to 300 metric tons of CO 2 , enabled by its biodiversity and strong demand.

The Philippine economy: Three scenarios for growth

Having grown faster than other economies in Southeast Asia in 2023 to end the year with 5.6 percent growth, the Philippines can expect a similarly healthy growth outlook for 2024. Based on our analysis, there are three potential scenarios for the country’s growth. 33 McKinsey analysis in partnership with Oxford Economics.

Slower growth: The first scenario projects GDP growth of 4.8 percent if there are challenging conditions—such as declining trade and accelerated inflation—which could keep key policy rates high at about 6.5 percent and dampen private consumption, leading to slower long-term growth.

Soft landing: The second scenario projects GDP growth of 5.2 percent if inflation moderates and global conditions turn out to be largely favorable due to a stable investment environment and regional trade demand.

Accelerated growth: In the third scenario, GDP growth is projected to reach 6.1 percent if inflation slows and public policies accommodate aspects such as loosening key policy rates and offering incentive programs to boost productivity.

Focusing on factors that could unlock growth in its seven critical sectors and themes, while adapting to the macro-economic scenario that plays out, would allow the Philippines to materialize its growth potential in 2024 and take steps towards achieving longer-term, sustainable economic growth.

Jon Canto is a partner in McKinsey’s Manila office, where Frauke Renz is an associate partner, and Vicah Villanueva is a consultant.

The authors wish to thank Charlene Chua, Charlie del Rosario, Ryan delos Reyes, Debadrita Dhara, Evelyn C. Fong, Krzysztof Kwiatkowski, Frances Lee, Aaron Ong, and Liane Tan for their contributions to this article.

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  1. Scarcity as the Basic Economic Problem

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COMMENTS

  1. Scarcity: What It Means in Economics and What Causes It

    Scarcity refers to the basic economic problem, the gap between limited - that is, scarce - resources and theoretically limitless wants. This situation requires people to make decisions about ...

  2. Scarcity in economics

    Scarcity is one of the fundamental issues in economics. Definition and a look at examples of scarcity and explaining how it affects prices, demand and future investment. ... It means there is a constant opportunity cost involved in making economic decisions. Scarcity is one of the fundamental issues in economics. ... A-Level Model Essays £9.00 ...

  3. Scarcity (article)

    In microeconomics, scarcity refers to the idea that resources are limited. It applies to physical resources like land, water, and oil, as well as intangible resources like time, skills, and attention. We have to make choices about how to allocate those resources. There are two main types of scarcity: absolute and relative.

  4. PDF Writing Economics

    Scarcity provides economics with its central problem: how to make choices in the context of constraint. Accordingly, economists ask questions such as: How does a consumer ... short essays, response papers, and possibly a rewrite. Below is a description of these types: • Term Paper (10-15pp.). In all tutorials, you will be required to write a

  5. Lesson summary: Scarcity, choice, and opportunity costs

    An introduction to the concepts of scarcity, choice, and opportunity cost. Economic resources are scarce. Faced with this scarcity, we must choose how to allocate our resources. Economics is the study of how societies choose to do that. Microeconomics focuses on how individuals, households, and firms make those decisions.

  6. Understanding Economics and Scarcity

    Economics. When faced with limited resources, we have to make choices. Again, economics is the study of how humans make choices under conditions of scarcity. These decisions can be made by individuals, families, businesses, or societies. Let's consider a few decisions that we make based on limited resources. Take the following: 1.

  7. Scarcity

    In economics, scarcity refers to limitations-limited goods or services, limited time, or limited abilities to achieve the desired ends. Life would be so much easier if everything were free! ... Robbins' most famous book was An Essay on the Nature and Significance of Economic Science, one of the best-written prose pieces in economics. That ...

  8. Introduction to Choice in a World of Scarcity

    This brings us to the subject of this chapter: why people make the choices they make and how economists explain those choices. You will learn quickly when you examine the relationship between economics and scarcity that choices involve tradeoffs. Every choice has a cost. In 1968, the Rolling Stones recorded "You Can't Always Get What You ...

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    How Scarcity Works in Economics. Written by MasterClass. Last updated: Oct 11, 2022 • 4 min read. Scarcity is a key economic concept that examines the relationship between theoretically unlimited wants and limited resources. Learn how scarcity affects demand. Scarcity is a key economic concept that examines the relationship between ...

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    AboutTranscript. Learn about the concept of scarcity, a crucial concept in the field of economics. Examine various examples of scarce resources (e.g. caviar, labor, housing) as well as free resources (e.g. air, water in certain contexts) as you learn how economics is a study of how to allocate scarce resources.

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  12. Scarcity and Consumer Decision Making: Is Scarcity a Mindset, a Threat

    Scarcity as a Mindset. In contrast to earlier work on scarcity that focused on differences in the experiences of impoverished versus middle-class consumers, Mullainathan and Shafir's book Scarcity: Why Having Too Little Means So Much changed the nature of the discussion about scarcity by suggesting that scarcity of a wide variety of resources (e.g., both time and money) can trigger similar ...

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    Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available.

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    Scarcity is a problem of fulfilling all of our human needs and wants with limited resources available. For example, durian. A fruit that only grows certain times of the year, when consumers demands for durian during a period of time where durians will not grow, scarcity will occur because of the limited durian available to fulfill the consumers ...

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    Conclusion. Scarcity is the main economic problem faced by all persons, businesses, and countries. In order to overcome this issue, a variety of approaches is used. The most widely used processes are market and command ones. An important role in this area belongs to economic and accounting profits and explicit and implicit costs.

  16. PDF CHAPTER 1: LIMITS, ALTERNATIVES, AND CHOICES Introduction Scarcity and

    While the College Board has developed separate AP microeconomics and macroeconomics exams, many concepts are central to both disciplines. The issues of scarcity, the economizing problem, opportunity cost, and production possibilities introduced in Chapter 1 are concepts that will very likely appear on both exams.

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    Economics Essay on Scarcity - Free download as Word Doc (.doc / .docx), PDF File (.pdf), Text File (.txt) or read online for free. This essay explains the economic problem of scarcity

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