Professional Documents
Culture Documents
Scarcity and Efficiency Refers To The Twin Themes of Economics
Scarcity and Efficiency Refers To The Twin Themes of Economics
Scarcity occurs where it's impossible to meet all unlimited the desires and needs
of the peoples with limited resources i.e; goods and services. Society must need
to find a balance between sacrificing one resource and that will result in getting
other.
Thus, the essence of economics is to acknowledge the reality of scarcity and then
figure out how to organize society in a way which produces the most efficient use
of resources.
• analyzes how a society's institutions and technology affect prices and the
allocation of resources among different uses.
• explores the behavior of the financial markets, including interest rates and stock
prices.
• examines the distribution of income and suggests ways that the poor can be
helped without harming the performance of the economy.
• studies the business cycle and examines how monetary policy can be used to
moderate the swings in unemployment and inflation.
• studies the patterns of trade among nations and analyzes the impact of trade
barriers.
This list is a good one, yet you could extend it many times over. But if we boil
down all these definitions, we find one common theme:
Economics is the study of how societies use scarce resources to produce valuable
commodities and distribute them among different people.
Behind this definition are two key ideas in economics: that goods are scarce and
that society must use its resources efficiently. Indeed, economics is an important
subject because of the fact of scarcity and the desire for efficiency.
1 This list contains several specialized terms from economics. To master the
subject, you will need to understand its vocabulary. If you are not familiar with a
particular word or phrase, you should consult the Glossary at the back of this
book. The Glossary contains most of the major technical economic terms used in
this book. All terms printed in boldface are defined in the Glossary.
man desires were fully satisfied, what would be the consequences? People would
not worry about stretching out their limited incomes because they could have
everything they wanted; businesses would not need to fret over the cost of labor
or health care; governments would not need to struggle over taxes or spending or
pollution because nobody would care. Moreover, since all of us could have as
much as we pleased, no one would be concerned about the distribution of
incomes among different people or classes.
In such an Eden of affluence, all goods would be free, like sand in the desert or
seawater at the beach. All prices would be zero, and markets would be
unnecessary. Indeed, economics would no longer be a useful subject.
Given unlimited wants, it is important that an economy make the best use of its
limited resources. That brings us to the critical notion of efficiency. Efficiency
denotes the most effective use of a society's resources in satisfying people's
wants and needs. By contrast, consider an economy with unchecked monopolies
or unhealthy pollution or unwarranted government interferences. Such an
economy may produce less than would be possible without these factors, or it
may produce a disorted bundle of goods that leaves consumers worse off than
they otherwise could be—either situation is an inefficient allocation of resources.
In economics, we say that an economy is producing efficiently when it cannot
make anyone economically better off without making someone else worse off.
The essence of economics is to acknowledge the reality of scarcity and then figure
out how to organize society in a way which produces the most efficient use of
resources. That is where economics makes its unique contribution.
Economic Efficiency
Definition of Efficiency
1. Productive efficiency.
This occurs when the maximum number of goods and services are produced with
a given amount of inputs. This will occur on the production possibility frontier. On
the curve it is impossible to produce more goods without producing less
services.Productive efficiency will also occur at the lowest point on the firms
average costs curve
2. Allocative efficiency
This occurs when goods and services are distributed according to consumer
preferences. An economy could be productively efficient but produce goods
people don’t need this would be allocative inefficient.
3. X inefficiency:
This occurs when firms do not have incentives to cut costs, for example a
monopoly which makes supernormal profits may have little incentive to get rid of
surplus labour. Therefore a firms average cost may be higher than necessary
4. Efficiency of scale
This occurs when the firms produces on the lowest point of its Long run average
cost and therefore benefits fully from economies of scale
5. Dynamic efficiency
This refers to efficiency over time for example a Ford factory in 1920 would be
very efficient for the time period, but by comparison would now be inefficient..
Dynamic efficiency involves the introduction of new technology and working
practises to reduce costs over time.
6. Social efficiency
This occurs when externalities are taken into consideration and occurs at an
output where the social cost of production (SMC) = the social benefit (SMB)
7. Technical Efficiency
8. Pareto Efficiency
A situation where resources are distributed in the most efficient way. It is defined
as a situation where it is not possible to make one party better off without making
another party worse off.
THREE QUESTIONS OF ALLOCATION:
The three basic questions that an economy must answer because of limited
resources and unlimited wants and needs are: What? How? and For Whom? The
basic problem of scarcity requires every society to determine: What goods to
produce? How to produce the goods? And who receives the goods that are
produced?
The pervasive problem of scarcity means that every society must choose among
alternative uses of its limited resources. Society has only so much labor, capital,
land, and entrepreneurship that can be used to satisfy the unlimited wants and
needs of its members. This decision-making process, more commonly termed
allocation, is summarized by the three questions: What? How? For Whom?
InBs12
What?
The first question society must answer is: What goods and services are produced
with society's limited resources? Does society make bagels or bread? Hammocks
or hot fudge sundaes? Computers or Cadillacs? Birdfeed or battleships? This
question is necessary because resources are limited but wants and needs are
unlimited. Society wants a lot of goods and services, but everything cannot
produced for everyone. Choices must be made. Society must choose among the
wide assortment of alternatives when selecting which goods to produce.
How?
The second question that needs to be answered is: How are society's limited
resources combined to produce goods and services? Are jogging shoes made with
leather or nylon? Are houses built with wood or brick? Are cars made with high-
tech robots or manual labor? Society, must decide which limited resources to use
for which goods. Every good cannot be made using the same resources. A hungry
consumer may want a hot fudge sundae made with expensive creamy custard,
but opts for less expensive ice milk.
For whom?
The third of the three questions of allocation is: Who receives the goods and
services produced with society's resources? All goods given to benevolent
economics instructors? Should goods be distributed according to shoe size? What
if people buy goods with their incomes? Now, there is a thought. But, what about
people who have no income? With limited resources, the production of goods is
also limited. With limited goods, everyone cannot have everything. Society has to
decide who gets what.