The Basic Economic Problem: Scarcity

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It is often said that the central purpose of economic activity is the production of goods and services to satisfy our changing needs and wants. The basic economic problem is about scarcity and choice. Every society has to decide: What goods and services to produce: Does the economy uses its resources to operate more hospitals or hotels? Do we make more iPhones and iPads or double-espressos? Does the National Health Service provide free IVF treatment for childless couples? How best to produce goods and services: What is the best use of our scarce resources? Should school playing fields be sold off to provide more land for affordable housing? Should coal be produced in the UK or is it best imported from other countries? Who is to receive goods and services: Who will get expensive hospital treatment - and who not? Should there be a minimum wage? If so, at what level should it be set? Scarcity We are continually uncovering of new wants and needs which producers attempt to supply by employing factors of production. For a perspective on the achievements of countries in meeting people’s basic needs, the Human Development Index produced by the United Nations is worth reading. The economist Amartya Sen (Winner of the 1998 Nobel Prize for Economics) has written extensively on this issue. Scarcity means we all have to make choices Because of scarcity, choices have to be made by consumers, businesses and governments. For example, over six million people travel into London each day and they make choices about when to travel, whether to use the bus, the tube, to walk or cycle – or whether to work from home. Millions of decisions are being taken, many of them are habitual – but somehow on most days, people get to work on time and they get home too! Trade-offs when making choices Making a choice made normally involves a trade-off – this means that choosing more

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