Unit 1 · Topic 1.1

Scarcity

Scarcity means wants are greater than the resources to meet them, so every person, business and government must choose, and every choice is a trade-off.

Practice 1: Principles and Models

Part 1 · Hook

Why this matters

Your town has one empty lot. Some residents want a park, store owners want a parking garage, and a grocery chain wants to lease it. Everyone has a good reason, and there is only one lot. That single, ordinary problem, more wants than resources, is where all of economics starts.

Part 2 · Prerequisite check

Quick check before you start

1. On a market graph, which variable goes on the vertical axis?

  1. Price
  2. Quantity
  3. Income
  4. Time
Show the answer

Price is vertical and Quantity horizontal on every market graph.

  • Correct: Price:
  • Quantity:
  • Income:
  • Time:

2. A variable on one of a graph's axes changes. On the graph you see

  1. a movement along the curve
  2. a shift of the curve
  3. a new axis
  4. no change
Show the answer

Only a change off the axes shifts a curve.

  • Correct: a movement along the curve:
  • a shift of the curve:
  • a new axis:
  • no change:

Part 3 · See it

See it first

A diagram: unlimited wants and limited resources (land, labor, capital, entrepreneurship) together create scarcity, which forces every society to choose what to produce, how, and for whom.
Unlimited wants and limited resources create scarcity, which forces every society to choose what to produce, how and for whom. LevlPrep original diagram.

Part 4 · Step by step

How it works, step by step

  1. People's wants are unlimited, but land, labor, capital and entrepreneurship are limitedresources are scarce
  2. Resources are scarceevery person, firm and government must choose how to use them
  3. Choosing one use of a resourcemeans giving up another use: a trade-off
  4. A whole society faces those choicesits economic system decides what to produce, how and for whom

Part 5 · Key ideas

Key ideas

  • Scarcity: wants are greater than the resources to meet them. It applies to rich and poor, and to time as well as money.
  • The four factors of production: land (natural resources), labor (human effort), capital (tools, machines, buildings) and entrepreneurship (organizing and risk-taking). Money is not one of them.
  • Every choice is a trade-off: using a resource one way means not using it another way.
  • Market, command and mixed economic systems answer what, how and for whom in different ways; most real economies are mixed.

Part 6 · Misconception

A common mistake

The wrong idea: Money is capital, so a business that borrows money has gained a factor of production.

What actually happens: In economics, capital means made goods used to produce other goods, such as machines and buildings. Money buys factors of production but is not one itself.

Part 7 · Check yourself

Check yourself

Exam-style questions. Anything you miss goes into your review queue.

Scenario

One empty lot in Riverton

The town of Riverton (an invented town) owns one empty lot downtown. Residents want a park, store owners want a parking garage, and a grocery chain offers to lease the lot for a new store. Building the garage would take a crew of 40 construction workers, two cranes and a fleet of dump trucks, and a local developer has offered to put up her own savings to run the project.

1. What makes the choice about Riverton's lot an economic problem?

  1. The town has run out of money for any project
  2. The lot cannot be used for a park, a garage and a store at the same time
  3. Store owners care more than residents do
  4. The grocery chain sets the price of the lease
Show the answer

Scarcity: one limited resource and several wants for it, so the town must choose.

  • The town has run out of money for any project: The scenario says nothing about the budget; even a rich town faces the choice.
  • Correct: The lot cannot be used for a park, a garage and a store at the same time: Right: limited land, unlimited wants for it, so a choice must be made.
  • Store owners care more than residents do: How much each group cares does not create the problem; the limited lot does.
  • The grocery chain sets the price of the lease: The lease price matters for the choice but does not create the scarcity.

2. Which factor of production is the lot itself?

  1. Land
  2. Labor
  3. Capital
  4. Entrepreneurship
Show the answer

Land means natural resources and the ground itself.

  • Correct: Land: Right: the lot is a natural resource.
  • Labor: Labor is human effort, such as the construction crew.
  • Capital: Capital is made tools and buildings, such as the cranes.
  • Entrepreneurship: Entrepreneurship is the organizing and risk-taking of the developer.

3. In the garage plan, which item is capital?

  1. The 40 construction workers
  2. The empty lot
  3. The developer's willingness to risk her savings
  4. The two cranes and the dump trucks
Show the answer

Capital is goods made to produce other goods: machines, tools, buildings.

  • The 40 construction workers: Workers supply labor.
  • The empty lot: The lot is land.
  • The developer's willingness to risk her savings: Taking the risk and organizing the project is entrepreneurship.
  • Correct: The two cranes and the dump trucks: Right: cranes and trucks are made tools used in production.

4. The developer offers her own savings to run the garage project. Which factor of production does she supply, and why?

  1. Capital, because she provides money
  2. Labor, because she works on the project
  3. Entrepreneurship, because she organizes the project and takes the risk
  4. Land, because the garage sits on the lot
Show the answer

Entrepreneurship combines the other factors and bears the risk. Money by itself is not a factor; it buys factors.

  • Capital, because she provides money: In economics capital means tools, machines and buildings, not money.
  • Labor, because she works on the project: Her role is to organize and take the risk, not to do the construction work.
  • Correct: Entrepreneurship, because she organizes the project and takes the risk: Right: she organizes and risks her savings.
  • Land, because the garage sits on the lot: The lot is land, but she does not supply it; the town owns it.

5. Which statement about scarcity is accurate?

  1. It ends once a country becomes rich enough
  2. It exists because wants are greater than the resources to meet them
  3. It applies to goods but not to time
  4. It means a store has sold out of a product
Show the answer

Scarcity is the gap between unlimited wants and limited resources. Rich countries and rich people face it too.

  • It ends once a country becomes rich enough: Wealthy societies still cannot have everything they want.
  • Correct: It exists because wants are greater than the resources to meet them: Right: limited resources, unlimited wants.
  • It applies to goods but not to time: Time is one of the scarcest resources there is.
  • It means a store has sold out of a product: A sold-out product is a temporary market problem; scarcity is permanent.

6. Which of these are capital in the economic sense? Select all that apply.

  1. A delivery van owned by a bakery
  2. A robot arm on a car assembly line
  3. Cash a bakery keeps in its bank account
  4. Crude oil still in the ground
Show the answer

Capital is goods made to help produce other goods. Money is not a factor of production, and oil in the ground is land.

  • Correct: A delivery van owned by a bakery: Right: a made good used to deliver bread.
  • Correct: A robot arm on a car assembly line: Right: a machine used to build cars.
  • Cash a bakery keeps in its bank account: Money buys factors of production but is not one.
  • Crude oil still in the ground: An unextracted natural resource is land.

7. A neighbor says, "Scarcity is not a problem for billionaires." What is the best reply?

  1. They still face limited time and must choose how to use it and their money
  2. They are right: with enough money each want is met
  3. They are right, at least in a market economy
  4. Scarcity applies to governments, not to people
Show the answer

Even very rich people have limited time and face choices among wants, so scarcity applies to everyone.

  • Correct: They still face limited time and must choose how to use it and their money: Right: time, at least, is always limited.
  • They are right: with enough money each want is met: Money cannot buy more hours in a day, and wants keep growing.
  • They are right, at least in a market economy: Scarcity does not depend on the economic system.
  • Scarcity applies to governments, not to people: Every person, firm and government faces scarcity.

Part 8 · Summary

Summary

Scarcity means wants are greater than the resources to meet them, so every person, business and government must choose, and every choice is a trade-off. The resources are the four factors of production: land, labor, capital and entrepreneurship. A society's economic system, market, command or mixed, decides what to produce, how to produce it and for whom; most real economies mix markets with some government roles.

Part 9 · Up next

What comes next

Part 10 · Connections

Connections

Question set for this topic