Lesson preview · Scarcity and choice
Scarcity, choice and opportunity cost
~8 min · Free to read
In early 2018, Cape Town in South Africa faced a water crisis. After years of low rainfall, the dams that supplied the city were running low. Officials warned of Day Zero: the day they would turn off the taps in most homes. People would then queue at about 200 collection points for 25 litres each a day.
From 1 February 2018, the city limited each resident to 50 litres a day. People now had to choose what each litre was for. A longer shower meant less water left for cooking and drinking. By early 2018, people had cut the city’s water use to about half of what it had been in 2015. That held Day Zero off until winter rain began to refill the dams in May. Day Zero never came.
Key Term
Scarcity
Cape Town’s problem is called scarcity: people want more than the available resources can provide. Wants have no limit, but water, land and time do. For each person, so does money.
Scarce doesn’t mean rare or expensive. Something is scarce when there isn’t enough of it to give everyone all they want for free. Even a billionaire faces scarcity, because time runs out. They get 24 hours a day like everyone else.
Key Term
The four factors of production
The inputs used to make goods and services fall into four groups, called the factors of production:
- Land: everything nature provides, such as fields, water, oil and fish.
- Labour: the work people do, with their hands or their heads.
- Capital: tools, machines and buildings made to produce other things. For a baker, capital is the oven, not the money in the bank.
- Enterprise: having an idea, bringing the other three together and taking the risk that it fails. The person who does this is an entrepreneur.
All four are limited. That is why scarcity never goes away.
Because resources are limited, every society must answer three questions:
- What to make. In early 2021, a worldwide shortage of computer chips hit carmakers. General Motors stopped work at three of its factories in North America. It kept building its most profitable models: big pickup trucks and big SUVs.
- How to make it. A city can build a road with many workers and shovels, or with a few workers and machines.
- For whom to make it. Cape Town shared out its water by giving every resident the same limit: 50 litres a day.
You face a smaller version of the same problem every weekend: more things to do than your time and money allow.
However you planned it, something ended up on the list, because your 12 hours were scarce. Once your day was full, adding anything from the list meant dropping something you had chosen. So every choice has a cost: the best thing you could have done with the same hours and money instead. That is its opportunity cost: the value of the next best alternative you give up when you choose. If you spent 3 hours studying and sleeping in was your next choice for those hours, the extra sleep is what studying cost you.
Trap · Common Misconception
Only the next best option counts
Say you have an evening to yourself and could see a film, go to a party or work a shift. You choose the film. If the party was your second choice, the party is the opportunity cost. You don’t add the shift too: you could only ever have done one thing with that evening. Opportunity cost is one option, not a total.
Trap · Common Misconception
"Free" still has a cost
A zero price doesn’t mean zero cost. A free concert still costs you whatever else you would have done that evening. A free museum uses a building that could have held shops. Even when school is free, a year of study costs the wage you could have earned in a job. Ask what you give up, not just what you pay.
Check yourself · no marks
Ayla finishes school. She could start university, take a full-time job paying 20,000 dollars a year, or take a gap year to travel. She ranks them: university first, the job second, travelling third. A grant pays her university fees. What is the opportunity cost of her first year at university?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 6
A billionaire says: “Scarcity is a problem for other people. I can afford anything I want.” Which reply is best?
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