Scarcity in microeconomics

Frequently asked questions

• Scarcity refers to the idea that resources are limited, and that we need to make choices about how to allocate them.

• Absolute scarcity (physical limitations) and relative scarcity (the value we place on resources).

• The physical limitations of resources, such as land, water, and oil.

• The value we place on resources, such as diamonds, which makes them scarce even though they are not absolutely scarce.

• It underpins the entire field, and helps us understand how people make decisions in the face of limited resources.

• The value of what we give up when we choose one option over another.

• When resources are scarce, prices tend to go up, which in turn affects supply and demand.

• When prices go up, people tend to use resources more efficiently or look for substitutes.

• Prices, taxes, subsidies, and regulations can all be used to incentivize people to use resources more efficiently.

• In a capitalist system, prices and market forces are used to allocate resources, while in a planned economy, the government might step in to make those decisions.