Economic Development

1. The ECONOMIC Problem

Economics is the science of scarcity; the science of how individuals and societies deal with the fact that wants are
greater than the limited resources available to satisfy those wants.

People must make choices because of scarcity. Because our unlimited wants are greater than our limited resources,
some wants must go unsatisfied. We must choose which wants we will satisfy and which we will not. For example, should
Abby buy a camera or a new phone?

The most highly valued opportunity or alternative forfeited when a choice is made is known as opportunity cost
which can be a money cost, time cost, or external cost. Every time you make a choice, you incur an opportunity cost. For
example, you have chosen to study economics. In making this choice, you denied yourself the benefits of doing something
else. You could have watched television, taken a nap, eaten your favorite food, and so on.

2. The Picture of the Economy

In an economy, production, consumption, exchange are carried out by the three basic economic units; the firm, the
household, and the government.

a. Firms make production decisions. These include what goods to produce, how these goods are to be produced and what
prices to charge. They employ the various factors of production which are land (natural resources), labor (physical and
mental talents of people), and capital (e.g. cash, factories, machinery, tools, computers, buildings).

b. Households make consumption decisions. They provide firms with factor services such as labor in production and buy
finished goods from firms for consumption.

c. The government collects taxes from households and firms for public services. Government intervention is presumed to
improve the allocation of resources. By supplying a medium of exchange, ensuring product quality, defining ownership
rights, and enforcing contract, the government increases the volume and safety of exchange.

When consumers demand more goods and services, producers increase their demands for the productive resources
used to make those goods and services. Anything used in making a finished product such as labor, raw materials, capital, and
land make up a factor market. Companies buy these productive resources in return for making payments at factor prices.

A factor market is different from the product or goods market – the market for finished products or services. In the
latter, households are buyers and businesses are sellers. But in a factor market, households are sellers and businesses are
buyers.

3. Why we don’t need to study the 7 big economic issues if SCARCITY does not exist?

If there were no scarcity, there would also be no economy. The reason for this is that if scarcity didn’t exist, neither
would economics and there is no such thing as economic system.

Economics can be defined as the study of how people make choices to reconcile their unlimited wants with their
limited resources. It can also be defined as the study of how society chooses to allocate its scarce resources when confronted
with the fact that people have unlimited wants.

Without scarcity the price of everything would be free, so there would be no necessity for supply and demand. We
don’t need to make choices for which wants we will satisfy and which we will not. There would be no need for government
intervention to redistribute scarce resources. No person will work harder for earnings increase because they can get
everything they wanted for free. And that will result to an increase in unemployment rate, we all know that as
unemployment rates increase, the inflation decreases. No need for the import goods or international trade because
everything is unlimited. Everything is equally distributed whether you are rich or poor. If there is no scarcity, then a fall in
economic growth would be meaningless.