Scarcity, Cost and Trade-offs



Scarcity of a resource, or how little you have of something, is the absolute building block of economics.

Ancient book representing Scarcity

If resources, and by resources I mean pretty much everything, were infinite, they would cost nothing. Like the air that you breathe. And water. Only water isn’t free because we pay for it to be nice and neatly transported to our taps via a series of pipes and, more importantly, we pay for it to be cleaned along the way. So essentially we pay for the delivery of water, not the actual commodity. If you want; you can go and collect your own and pay nothing. I wouldn’t advise it though.

Back to the point I was trying to make, when there isn’t that much of something, there is an inherent value to it as not everyone can have it. Gold, diamonds and oil are all valuable because of their scarcity. Scarcity alone does not define value however, labour, demand and supply all affect it, but we’ll leave that for another day.

So, keeping in mind the idea that resources are scarce, we move onto the principles that underlie purchases...

Trade-Offs:– If you buy one thing, you cannot buy another. Unless of course you are Bill Gates. The rest of us mere mortals have to make decisions based on income, time availability and need.

Cost:– The cost of something is weighed against the benefit. Every time you make a purchase, say a television, you are trading off against buying, say, a HiFi or maybe an expensive handbag.

Incentives:- When we have an incentive to purchase a product, we choose that product over another, for example an expensive brand over a supermarket own-brand; normally we might purchase the supermarkets product, but sometimes the known brand is on offer so we choose to buy that instead.

Implicit Costs

The actual price of a product is its ‘explicit cost’, the implicit cost is a mixture of all the things you give up when making a purchase. All of the concepts discussed above are examples of implicit cost.

Opportunity Cost

This is the next opportunity given up in order to make said purchase; so the implicit cost can be said to include the ‘loss’ of the next opportunity. However, there are implicit benefits too; for example the psychological effects of an expensive new suit versus wearing an old tatty one. To multiply this effect, imagine you then have a job interview. Not only will you look more presentable but you will feel better, more confident and more able. It’s impossible to put an actual monetary value on these benefits, but they are there.