Concepts of Scarcity and Choice

Concepts of Scarcity and Choice Economics can be defined as the study of the practical science of production and distribution of wealth ( J S MILLS). The objective of all persons is to earn money by working in order to satisfy their wants. Unfortunately people earnings are never enough in order to satisfy their unlimited wants as there is a lack of resources in terms of workers, raw materials, time, and money in order to produce all the products that we would like to acquire which causes the problem of scarcity. SCARCITY AND CHOICE Scarcity is a relative concept that is resources are scarce relatively to unlimited wants. The problem of scarcity exists in all dimensions that are in terms of individual, society as well as countries. For example as far as individual is concerned in search of improving our standard of living we are always striving to have better and more luxurious shelter, latest fashion clothing, full option types of transport, better health care etc but due to limited resources we cannot satisfy all these wants and in terms of countries Governments are always having difficulties in choosing where to invest there are too many necessities to fulfill due to lack of resources. As a result of scarcity each and every person as well as the Government needs to make a choice so that the limited available resources is used efficiently. OPPORTUNITY COST As a result of the lack of resources and the problem of scarcity, we have to choose and decide which products or services are most important for us to buy with the limited amount of money we earn and which ones are less important that we could forego. As in define by Susan Grant Opportunity cost is the cost of a decision in terms of the best alternative given up to achieve it. Say if I have one hour free time during which I can either go the cinema or at the seaside, if I choose going to the cinema then the next best alternative forgone is going at the seaside. Quantity of Good X Given a production point on a PPC (A). If a country chooses to produce more of good X- in other words moving to point B on the PPC, this can only be possible by decreasing resources out of the production of good Y to the production of good X, implying a reduction in the quantity of Y produced. Therefore in order to produce more of good X, a country needs to give up some amount of good Y. In other words there is an opportunity cost of producing more of good X. Opportunity cost of producing X X1 of good X= Y Y1 of good Y. Micro Economics Micro Economics is the study of the behaviors of individuals and companies in line with income, profits, prices of available goods and services. These behaviors are directly related to supply and market as well as taxes and regulations impose by the Government. For example in the case of an individual Micro Economics examines how the latter make decisions on which products or services to buy depending on his income and as regards to a company it is the study of how the decision makers minimize production cost so as to offer competitive prices on the market. Macro Economics Macro Economics, on the other hand is the study of economics at a larger scale that is how a national economy works and its direct impact on growth in national income, employment and price inflation. In other words Macro Economics can be explained as the global decision making of the Government and its impact on aggregate demand. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nationsÂÂ  capital account or how GDP would be affected by unemployment rate. (http://www.investopedia.com). TASK 2 How demand curve is derived. In order to determine how a demand curve is derived we need to know what demand is. Demand is the willingness of potential consumers to buy goods and services at different level of prices. Figure 2 shows a demand curve The figure below shows what the demand for apple at different prices is. The curve illustrates that when Price of an apple is at $1 demand is 53 Price of an apple is at $2 demand is 38 Price of an apple is at $3 demand is 27 Price of an apple is at $4 demand is 17 Price of an apple is at $5 demand is 10 Thus we can deduce that normally the lower the price of an apple is offered at the higher is the demand and conversely the higher price of an apple is offered at the lower is the demand. Demand is inversely related to price that is in this case demand of the apple is inversely related to price of the apple. Normally producers of a specific product need to study the demand curve of that product so as to decide the number of unit to produce taking into consideration production cost. With regards to demand producers will produce the product in demand provided The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price. The demand curve is usually downward sloping, since consumers will want to buy more as price decreases. Demand for a good or service is determined by many different factors other than price, such as the price of substitute goods and complementary goods. In extreme cases, demand may be completely unrelated to price, or nearly infinite at a given price. Along with supply, demand is one of the two key determinants of the market price. 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