- Money problems — shopping and budgeting · coming soon
- Time calculations · coming soon
Two dollars and five things you want
It is break time at school, and you are hungry. You have $2. The canteen sells rice with curry for $1.80, noodle soup for $2.00, a vegetable puff for $0.80, a fruit cup for $1.00 and a mango drink for $2.00. You would like all five.
All five cost $7.60 together. You have $2. So you must choose.
Most people think the problem here is money. Give the student more money, and the problem goes away. This lecture shows that this idea is wrong. The problem is bigger than money, and it never goes away completely. It has a name: scarcity. It is the reason the subject called economics exists.
Wants and resources
Start with the two sides of the problem.
A want is anything a person would like to have or to do. Food, a phone, a holiday, more sleep, a better school, a cleaner river. Some wants are also needs: things a person must have to live, such as water, food and shelter. Every need is a want, but not every want is a need.
Wants have a special feature. They do not run out. When one want is satisfied, another one appears. A student who gets a bicycle soon wants a better one, or a helmet, or a trip to ride it somewhere new. Economists say that wants are unlimited. This does not mean that one person wants an infinite amount of rice. It means that the list of things people would like is never finished.
A resource is anything that can be used to satisfy a want. Money is the one we notice first, but it is not the only one. Time is a resource. Land, water and fuel are resources. So are people's work and skills, and the machines and buildings they use.
Resources have the opposite feature. Every resource is limited. A day has 24 hours. A country has a fixed area of land. A river carries only so much water. A factory can make only so many shoes in a week. A later lecture sorts resources into four groups, called the factors of production. For now, one fact is enough: there is never as much of them as people would like.
The economic problem
Put the two sides together. Wants are unlimited. Resources are limited. So there are never enough resources to satisfy every want.
Scarcity means that people's wants are greater than the resources available to satisfy them.
Because of scarcity, every person, business and government must make choices. This is called the economic problem.
Notice the last step. Scarcity does not just mean "we cannot have everything". It means "we must choose". The student at the canteen chooses. A family chooses what to spend its wages on. A government chooses between a new hospital and a new road. Each of them is facing the same problem, at a different size.
That is it. That is the whole idea. Everything else in economics is a study of how those choices are made, and what happens because of them.
More money does not end scarcity
Now test the idea that money is the real problem. In the model below, you can give the student more money. Watch what happens to the choice.
Choose how much money the student has. Then tick the foods you would buy. The bars show how much of the money and of the 20-minute break your choice uses. Try $2 first, then $10.
Money:
This table shows the five foods at an invented canteen, with the price and the time needed to queue and eat. The break lasts 20 minutes.
| Food | Price | Minutes |
|---|---|---|
| Rice with curry | $1.80 | 10 |
| Noodle soup | $2.00 | 9 |
| Vegetable puff | $0.80 | 3 |
| Fruit cup | $1.00 | 4 |
| Mango drink | $2.00 | 7 |
| All five | $7.60 | 33 |
With $2, money is the limit: the student can buy only one main food, or a puff and a fruit cup ($1.80, 7 minutes). With $10, the student can afford all five, but they take 33 minutes and the break is 20. Now time is the limit. Any choice that fits in 20 minutes leaves at least one food out. The model leaves out other limits, such as how much one person can eat, and it assumes the queues are always the same length.
With $2, money stops you first. With $10, money is no longer a problem, because all five cost only $7.60. But the break is 20 minutes long, and buying and eating all five takes 33 minutes. Time stops you instead. The scarce resource changed, but the need to choose did not.
This is true for the richest people in the world too. A very rich person can buy almost anything in a shop. But that person still has 24 hours in a day, and cannot be in two places at once. That person's attention, health and energy are limited. So that person still has to choose how to spend a day, which people to see and which projects to work on.
Suppose every person in a country became ten times richer overnight. Would scarcity end in that country?
Show the answer
No. First, everyone would still have 24 hours in a day. Second, the country would still have the same land, water and number of workers the next morning. Money lets you claim resources, but it does not create them. If everyone has ten times more money and there are the same number of houses, people will compete for those houses. Third, wants would grow too: people would start to want things they had not thought about before. Scarcity would still be there.
Scarcity is not a shortage
Students often mix up two words that sound alike.
A shortage is a short-term situation. On one morning, the bakery near you sells out of bread by 8 a.m. That is a shortage. Tomorrow, the baker may make more, and the shortage is over.
Scarcity is permanent. Even on a day when the bakery has plenty of bread, bread is still scarce. Making it uses flour, ovens, fuel and the baker's time. Those resources could have been used for something else. So bread is scarce whether or not the shelves are full.
This means that a good can be scarce without being in short supply. In economics, almost everything you can buy is scarce. That is exactly why it has a price.
Free goods and economic goods
Is anything not scarce? A few things are. Think of the air on a windy hilltop. You can breathe as much as you like, and nobody else gets any less. Nobody has to give anything up for you to have it. A good like that is called a free good.
Almost everything else is an economic good: a good that is scarce, so using it means that some resource cannot be used for something else.
Be careful. "Free good" does not mean "costs you no money". A free school lunch costs you nothing. But food, cooking fuel and the cooks' time were used to make it. Those resources could have made something else. So a free school lunch is an economic good. Someone, somewhere, gave something up.
Whether a good is free can also depend on the place and the time. Air on a hilltop is a free good. Clean air in a city full of traffic is not. To get cleaner air, the city must give something up, such as fewer cars on the roads or money spent on cleaner buses. Sort the cases below and see the rule appear.
Put each card in a box. Ask one question every time: does anyone, anywhere, have to give something up for this? Read the reason on each card after you place it.
This list sorts ten goods into free goods and economic goods, with the reason for each.
- Free good: Air to breathe on a windy hilltop. There is far more than anyone wants, and your breathing takes nothing from anyone else.
- Economic good: Clean air in a city full of traffic. Cleaner air means giving something up, such as fewer cars or money for cleaner buses.
- Free good: Sea water at a beach. There is far more than anyone can use, and nobody gives anything up when you swim in it.
- Economic good: Drinking water in a dry city. Water used by one person, farm or factory cannot be used by another, and cleaning and piping it uses resources.
- Free good: Sunlight on a field. Your field getting sunlight does not take any sunlight away from anyone else's field.
- Economic good: Your time in the week before an exam. Every hour spent on one subject cannot be spent on another, or on rest.
- Economic good: A seat on a bus in the rush hour. If you sit in it, someone else stands. There are fewer seats than people who want them.
- Free good: Sand in the middle of a large desert. There is far more than anyone wants to take, so nobody gives anything up.
- Economic good: Sand for building on a small island. An island with little sand may have to buy it from abroad, using money and ships that had other uses.
- Economic good: A free school lunch. It costs you nothing, but food, fuel and the cooks' time were used. Those could have made something else.
What scarcity forces every society to decide
A school canteen, a family and a country all face the economic problem. When the group is a whole society, the choices it must make fall into three questions:
- What should be produced? More houses or more factories? More rice or more fruit?
- How should it be produced? With many workers, or with a few workers and many machines?
- For whom should it be produced? Who gets the goods when there is not enough for everyone?
Different countries answer these questions in different ways. A later lecture compares those ways.
The last question needs a way of sharing out what is scarce. There are several. A price gives the good to those who are willing and able to pay. A queue gives it to those who arrive first. A rule can give everyone an equal amount. A lottery gives it by chance. Each way is fair in one sense and unfair in another. The worked examples below show some of them in use.
Anika is awake from 7 a.m. to 10 p.m. on Saturday. She would like to play football (2 hours), play a computer game (3 hours) and watch a series (4 hours). She also wants to revise for a test (3 hours), meet friends (4 hours), help at home (1 hour) and have her meals (2 hours). Show that her time is scarce. (This example is invented.)
Think first. Compare the time she wants to use with the time she has.
Time she has: from 7 a.m. to 10 p.m. is 15 hours.
Time she wants to use: hours.
Her wants are 4 hours greater than her resource. So her time is scarce, and she must give up at least 4 hours of activities. Money does not help her here. Time is the scarce resource.
Check. Even if she drops the computer game (3 hours), she still has 16 hours of wants and 15 hours of time. She must give up something more.
A family earns $1 800 a month. This month they want to pay rent ($700), food ($450), transport ($150), school costs ($100) and phones ($60). They also want a new fridge ($520) and a short holiday ($400). What must they do? (This example is invented.)
Think first. Add up the wants, then compare with the income.
Total wants: dollars. The gap is dollars.
They cannot have everything this month. The first five items are needs or close to needs, and they cost $1 460. That leaves $340. This is not enough for the fridge or for the holiday. So they must choose: save the $340 for next month's fridge, or spend it on something smaller now.
Check. . ✓ Whatever they decide, something they wanted does not happen. That is scarcity.
A country that is short of land and water
Singapore is a clear real example, because its scarce resources are easy to see.
Land. In 1960, Singapore had 581.5 km² of land. By 2025 this had grown to 744.3 km² (Singapore Department of Statistics, using Singapore Land Authority figures). That is about 28% more land. The extra land was made by reclamation: filling in areas of shallow sea with sand and earth. One example is Jurong Island, the centre of the country's chemical industry. It was made by joining seven small islands. Their area grew from 9.91 km² to about 32 km², and the work finished in 2009.
Making land is very expensive. A country builds land only when the land it has is truly scarce. Even then, the choices continue. A piece of land used for a port cannot also be a park. Land used for homes cannot also hold a factory.
Water. Singapore has heavy rain, but little land to collect it on. Under an agreement signed in 1962, it buys water from the Malaysian state of Johor, and this agreement ends in 2061. To depend less on it, Singapore treats used water so that it is clean enough to use again (it calls this NEWater) and removes the salt from sea water. The national water agency, PUB, says these two sources can meet up to about 40% and 25% of today's demand.
Notice what happened. Scarcity did not go away. Singapore chose to use other resources, such as money, energy, machines and engineers' time, to produce more land and more water. Those resources were then not available for other uses.
The situation. Cape Town, a city of about 4 million people in South Africa, had three dry years in a row from 2015. By early 2018 its dams were very low. The city warned of a "Day Zero": if the dams fell to 13.5% full, most taps would be turned off. People would then collect 25 litres each per day from about 200 collection points.
The policy. From 1 February 2018 the city limited water use to 50 litres per person per day, down from 87 litres. Its target for the whole city was 450 million litres a day. It also raised water prices sharply for heavy users, banned many outdoor uses, and fined people who used too much.
The prediction. Economics predicts that when a scarce good is shared out by strict rules and higher prices, people will use less of it. It also predicts that this is painful: people must give up uses they valued, such as gardens, long showers and some jobs that need water.
What happened. Daily use fell from almost 1.2 billion litres in February 2015 to about 510 to 520 million litres by March 2018. These figures were given by the leader of the party that ran the city (reported by the Mail & Guardian). That is a fall of more than half. The city never reached its 450 million target, but Day Zero never came. Winter rain filled the dams to about 70% by September 2018. From 1 October 2018 the limit was raised to 70 litres per person and prices were lowered (City of Cape Town). Within a few weeks, daily use rose to about 593 million litres.
Verdict. The rules and prices worked: they made a scarce resource last until the rain came. But two lessons stand out. First, the rain mattered as much as the policy: without it, Day Zero would only have been delayed. Second, use went up again as soon as the rules were relaxed. The rules did not end scarcity. They only decided how the scarce water was shared.
Three traps
Scarcity affects everyone, rich and poor, because wants are always greater than resources. A poor family and a rich family both face scarcity. What differs is which resources are scarce for them, and how hard the choices are.
Running out is a shortage, and it can be short-term. Scarcity is permanent: a good is scarce even when shops are full of it, because making it used resources that could have made something else.
A good that costs you nothing can still be an economic good. A free bus ride or a free school lunch used fuel, food and people's work. Ask: did anyone, anywhere, have to give something up? If yes, the good is scarce.
Work each one on paper first. Open a hint only when you are stuck.
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Say whether each of these is a free good or an economic good. Give a reason for each: (a) sea water at a beach, (b) bottled sea water sold for an aquarium, (c) a seat in a cinema, (d) moonlight.
Hint 1
Ask the test question: does anyone have to give something up for you to have it?
Hint 2
Think about what was used to put the sea water into bottles and bring it to the shop.
Full answer
(a) Free good: there is far more than anyone wants, and your use takes nothing from anyone. (b) Economic good: bottles, transport and workers' time were used, and these could have been used for something else. The water is the same, but the good on sale is not. (c) Economic good: a cinema has a limited number of seats, so if you sit in one, someone else cannot. (d) Free good: you can enjoy all of it and nobody else gets less. Check: in every answer, the reason uses the test question, not the price.
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Ravi has 6 hours free on Sunday. He wants to study (3 hours), play cricket (2 hours), visit his grandmother (2 hours) and watch a film (2 hours). Show that his time is scarce. Then give one choice that fits, and say what he gives up.
Hint 1
Add up the hours he wants and compare with 6.
Hint 2
His wants add up to more than 6 hours. Find activities whose hours add up to 6 or less.
Full answer
He wants hours but has 6. His wants are 3 hours greater than his time, so time is scarce. One choice that fits: study (3 hours) and visit his grandmother (2 hours), which uses 5 hours. He gives up cricket and the film. Check: , which is not more than 6. ✓ Other choices fit too, but every choice that fits gives up at least 3 hours of what he wanted.
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A town of 20 000 people can supply 2 400 000 litres of water a day. Each person would like to use 150 litres a day. (This town is invented.) Is water scarce here? If the town shares water out equally, how many litres does each person get?
Hint 1
Work out how much water the whole town would like to use each day.
Hint 2
For the equal share, divide the supply by the number of people.
Full answer
The town would like litres a day, but can supply 2 400 000. Wants are 600 000 litres greater than the resource, so water is scarce. An equal share is litres each. Check: . ✓ Each person gets 30 litres less than they wanted, so each person must choose which uses to give up.
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The town in question 3 is deciding how to share out its water. Plan A: everyone gets an equal 120 litres a day. Plan B: no limit, but the price of water is raised until people choose to use only 2 400 000 litres in total. Give one group that would prefer each plan, and explain why. Does either plan end scarcity?
Hint 1
Think about a large family on a low income, and a business that needs a lot of water.
Hint 2
With a price, who decides how much water each person uses? With an equal share, who decides?
Full answer
A low-income family might prefer Plan A. They are sure to get 120 litres each, however little money they have. Under Plan B, a high price might force them to use less than they need. A business that needs a lot of water, such as a laundry, might prefer Plan B. Under Plan A it is stuck with a fixed amount, but under Plan B it can buy more if it is willing to pay. Neither plan ends scarcity. The town still has 2 400 000 litres for wants of 3 000 000 litres. The plans only decide who gives up which uses. Check: both plans share out exactly the same total, 2 400 000 litres, which matches the Cape Town lesson.
In 1932 the British economist Lionel Robbins gave a definition of economics that is still widely used. He described economics as the study of how people behave when they have many ends but only scarce means. Each of those means could be used in more than one way. The ends are wants. The scarce means are resources. And because each resource has other possible uses, every use is a choice.
This tells you what economics is really about. It is not mainly about money, or banks, or shops. It is about choice. A student choosing between revision and football, a city choosing how to share its water and a country choosing where to put a port are all doing the same thing. Once you see scarcity, you see economics everywhere. The next lecture asks a sharp question about every one of those choices: when you choose one thing, what exactly do you give up?
- Scarcity means that people's wants are greater than the resources available to satisfy them.
- Wants are unlimited because new wants appear as old ones are satisfied, while every resource, including time, is limited.
- Because of scarcity, every person, business and government must make choices, and this is called the economic problem.
- Scarcity is not poverty and not a shortage: rich people face it too, and a good is scarce even when shops are full of it.
- A free good is one that nobody has to give anything up for, while an economic good uses resources that had other uses, even when it is free to you.