Scarcity and Efficiency

“Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.” 

Behind this definition there are two key ideas in economics: 

1. Those goods are scarce and 
2. That society must use its resources ‘efficiently’. 

Indeed economics is an important subject because of the fact of scarcity and the desire of efficiency. 

Consider a world without scarcity. If infinite quantities of every good could be produced or if human desires were fully satisfied, then, people would not worry about stretching out their limited incomes because they could have everything they wanted, business would not need to worry over the cost of labour, governments need not struggle over taxes or spending or pollution because nobody would care. Moreover, since all of us could have as much as we want, 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. Prices would be zero, markets would be unnecessary. Indeed, economics would no longer be a useful subject. 

But, in reality, no society has reached a state of limitless possibilities. Ours is a world of ‘scarcity’, full of economic goods. A situation of scarcity is one in which goods are limited relative to desires. Even after two centuries of rapid economic growth, production in the United States is simply not high enough to meet everyone’s desire. 

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 society’s resources in satisfying people’s wants and needs. By contrast, consider an economy with unchecked monopolies or unhealthy pollution or government corruption. Such an economy may produce less than would be possible without these factors, or it may produce a distorted bundle of goods that leavers 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 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.


Notes provided by Prof. Sujatha Devi B (St. Philomina's College)