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Scarcity is one of the basic problems we face in our everyday life. People run into scarcity because the resources available are limited and there are unlimited wants. Due to the unlimited wants and the limited resources, human beings have to choose, efficiently allocate resource, and make trade-offs. In economics, we study production, distribution, and consumption. If people make no choices about what to produce, dispense or consume, economics study would not be real. Limited resources force people to make decisions, forego some items, and look for an alternative.
If there were no scarcity, everything would be free. A commodity is said to be scarce if it costs something. Normally, all what individuals and the society consume is scarce and costs something. When a person decides to consume one item, he or she foregoes another one. Hence, scarcity creates a necessity for decision-making. In the market, some goods are usually expensive compared to others. The cost of an item normally signals its scarcity. A certain commodity may be scarce in comparison to another because of its high demand or limited resources. For instance, shark meat and chicken are scarce goods. Although both have a price, shark meat is expensive than chicken. The reason behind the difference in price is that the resources required to produce shark meat are limited by capital and the much work involved catching a shark. However, the labor and capital needed to produce chicken is minimal.
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Making choices usually involve trade-offs. Simply put, when one decides to buy one thing, he or she has to give up on another in exchange. For example, people make choices concerning housing. Based on the varying costs and benefits of buying or renting a house, some decide to rent while others choose to buy. Since both decisions involve some risk, individuals have to weigh the benefits and the costs of their decisions before making a final choice.
Another life example is when deciding on whether to work part-time or full-time. Depending on situation, like if one is studying, one will choose to work part-time. When one decides to quit a certain job for another that is less paying but flexible, there is the application of opportunity cost. Changing to the flexible job means that one will enjoy less wages hence will have to look for other means to earn some more income, and at the same time, he or she will have to fore go some purchase that would have comfortably made with the money earned from the previous job. On the other hand, the new flexible job generates happiness, creates time for other chores, and may be less tiring. A student may choose to finish assignments or joins friends at a party. If the student chooses to go partying, the opportunity cost is finishing the class assignments.
When one is able to identify the point of diminishing returns and stop any further activity from that point can produce much benefit. The benefits are usually in terms of fulfillment, increased productivity, contentment, and job success. When people fail to identify the diminishing returns point they fall into a trap of investing unnecessarily and wastage of energy.
For example, many people think that there is more to achieve by working for long hours. A student is capable of producing two reports in an hour. From calculation, one working for ten hours would produce twenty reports while forty hours will mean eighty reports. In reality, the student working for forty hours may not produce eighty reports. However correct the calculation may be, reality says otherwise. As human beings, we tire and we need some sleep to relax our minds and renew our strength. Machines are consistent in production but it is not the case with human being. Working more hours is not a guarantee of more work. In fact, as one works for long, output goes down and the quality of the reports goes down. To produce a perfect job, one has to think on whether the extra work he or she is doing is worth the opportunity cost. If the opportunity cost exceeds the probable value one may get, it is important that one halt the current activity.
Another example of diminishing returns is during feeding. One may have a liking for chocolate cake or chocolate bars. However, it is not likely that one will consume three chocolate cakes in a day because of the diminishing returns. Normally, the first chocolate cake satisfies one fully. As he or she continues consuming an extra cake, the satisfaction drawn decreases with each extra cake consumed until a point where any extra cake consumed would harm the person’s health.
The market system is based on supply and demand. If the demand for a particular product is high, the price of the product in the market increases. Manufacturers driven by the need to make more profits at the high price increase the production of the product thereby increasing its supply in the market. Supply of the product increases in response to the high demand and so because it makes sense for the producers to invest more to increase the supply to take advantage of the high prices. As the supply of the product increases, the price goes down and the demand increases, as more people are able to afford it at the lower prices. At the point of equilibrium, the demand of a product and the supply are equal. The suppliers are producing enough goods to meet the markets demand. Everyone in the market is comfortable with the economic condition. At the equilibrium price, the suppliers are selling all that they produce and the consumers are getting all the goods demanded.