McConnell-Brue-Barbiero: Microeconomics, Ninth Canadian Edition

I. An Introduction to Economics

2. The Economic Problem: Scarcity, Wants, and Choices

© The McGraw-H Companies, 2003

McConnell-Brue-Barbiero: Microeconomics, Ninth Canadian Edition

I. An Introduction to Economics

2. The Economic Problem: Scarcity, Wants, and Choices


The foundation of economics. The nature of economic efficiency.

How to achieve economic growth •

The two general types of economic systems society can choose to coordinate production and consumption decisions. •

What the circular flow model is.

Economic Problem: Scarcity, Wants, and Choices

You make decisions every day that capture the essence of economics. Suppose you have $40 and are deciding how to spend it. Should you buy a new pair of jeans? Two or three compact discs? A ticket for a concert?

chapter two • the economic probLem: scarcity, wants, and choices

Should you forgo work while you are attending college or university and concentrate solely on your coursework and grades? Is that an option for you, given the rising cost of post-secondary education? If you decide to work, should it be full-time or part-time? Should you work on campus at lower pay or off campus at higher pay? What are the implications of your employment for your course grades?

Money and time are both scarce, and making decisions in the context of scarcity always means there are costs. If you choose the jeans, the cost is the forgone CDs or concert. If you work full-time, the cost might be greater stress, poorer performance in your classes, or an extra year or two in school.

This chapter examines the fundamentals of economics—scarcity, choice, and costs. We first examine the economic roblem, focusing closely on wants and resources. Next, we develop two economic models: (1) a roduction ossibilities model that incorporates and illustrates several key ideas, and (2) a simple circular flow model that identifies the major groups of decision makers and major markets in the economy.

The Foundation of Economics


Choices are necessary because society's material wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce).

utmty The satisfaction or pleasure a consumer obtains from the consumption of a good or a service.

Two fundamental facts together constitute the economic problem and provide a foundation for economics:

• Society's wants are virtually unlimited and insatiable.

• The resources for producing the goods and services to satisfy society's wants are limited or scarce.

All that follows depends directly on these two facts.

Unlimited Wants

What do we mean by "wants"? We mean, first, the desires of consumers to obtain and use various goods and services that provide utility—that is, pleasure or satisfaction. These wants extend over a wide range of products, from necessities (food, shelter, and clothing) to luxuries (perfumes, yachts, race cars). Some wants—basic food, clothing, and shelter—have biological roots. Other wants—for example, the specific kinds of food, clothing, and shelter we seek—are rooted in the conventions and customs of society.

Over time, wants change and tend to multiply, fuelled by new products. Not long ago, we did not want personal computers, Internet service, digital recorders, lattes, or pagers because they simply did not exist. Also, the satisfaction of certain wants tends to trigger others: The acquisition of an Escort or Civic has been known to whet the appetite for a Porsche or a Mercedes.

Services, as well as products, satisfy our wants. Car repair work, the removal of an inflamed appendix, legal and accounting advice, and haircuts all satisfy human wants. Actually, we buy many goods, such as automobiles and washing machines, for the services they render. The differences between goods and services are often smaller than they appear to be.

Businesses and units of government also strive to satisfy economic goals. Businesses want factories, machinery, trucks, warehouses, and phone systems to help them to achieve their production goals. Government, reflecting the collective wants of its citizens or goals of its own, seeks highways, schools, and military equipment.

All these wants are insatiable, or unlimited, meaning that our desires for goods and services cannot be completely satisfied. Our desires for a articular good or service

Part One • An Introduction to Economics and the Economy can be satisfied; over a short period of time we can surely get enough toothpaste or pasta. And one appendectomy is plenty.

But goods in general are another story. We do not, and presumably cannot, get enough. Suppose all members of society were asked to list the goods and services they would buy if they had unlimited income. That list would probably never end.

In short, individuals and institutions have innumerable unfilled wants. The objective of all economic activity is to fulfill wants.

Scarce Resources economic resources

The land, labour, and entrepreneurial ability that are used in the production of goods and services.

Land Natural resources ("free gifts of nature") used to produce goods and services.


Human-made resources (buildings, machinery, and equipment) used to produce goods and services.


Spending for the production and accumulation of capital and additions to inventories.

labour The physical and mental talents and efforts of people that are used to produce goods and services.

entrepreneurial ability The human resources that combine the other resources to produce a product, make non-routine decisions, innovate, and bear risks.

The second fundamental fact is that resources are limited or scarce. By economic resources we mean all natural, human, and manufactured resources that go into the production of goods and services. That includes all the factory and farm buildings and all the equipment, tools, and machinery used to produce manufactured goods and agricultural products; all transportation and communication facilities; all types of labour; and land and mineral resources. Economists classify all these resources as either ro erty resources—land and raw materials and capital—or human resources— labour and entrepreneurial ability.

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