Scarcity and the economic problem
Economics begins with the observation that people have unlimited wants but resources are limited. This mismatch creates scarcity, forcing individuals, firms and governments to make choices about how best to allocate their resources. Every choice involves a trade‑off because choosing one option means giving up another. The study of economics therefore focuses on how to allocate scarce resources efficiently to satisfy as many wants as possible.
Needs, wants and resources
Basic needs such as food, shelter and clothing are essential for survival. Wants go beyond necessities and include the vast array of goods and services that improve our quality of life, from smartphones and holidays to education and healthcare. Resources used to meet these needs and wants include land (natural resources), labour (human effort), capital (machinery and tools) and enterprise (entrepreneurship). Because resources are scarce, societies must decide what to produce, how to produce and for whom to produce.
Goods and services
Economics distinguishes between goods (tangible products) and services (intangible activities). Goods can be further classified into consumer goods (purchased by households for immediate use) and capital goods (used by firms to produce other goods and services). Services range from healthcare and education to banking and entertainment.
| Category | Description | Examples |
|---|---|---|
| Needs | Essential items required for basic survival | Food, water, shelter, clothing |
| Wants | Goods and services that improve comfort and quality of life | Cars, smartphones, holidays |
| Consumer goods | Tangible products purchased by households for consumption | Bicycles, books, clothing |
| Capital goods | Man‑made resources used to produce other goods and services | Machinery, tools, vehicles |
| Services | Intangible activities performed for others | Banking, hairdressing, teaching |
Because resources are scarce, society must prioritise among competing uses. Opportunity cost (covered in Chapter 3) and production possibilities (Chapter 4) help to explain these decisions.
