Scarcity and opportunity cost: what’s the link?

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Scarcity and opportunity cost are two interrelated concepts in economics as companies often have to choose between scarce resources. In most cases, economic resources are not always fully available in unlimited numbers, so companies have to make a choice about which resources to use during production. Opportunity cost represents the alternative given up in choosing one resource over another. These two concepts have a direct connection because, for example, companies can use a lower quality but more available resource for the production of goods.

Choosing is among the most common activities in an economy. Both individuals and businesses have to decide which elements to use to meet the inherent needs and requirements of all parties in an economy. Scarcity can force choices when resources start to run out. For example, a timber producer may need to choose which timber to harvest because some species are unavailable.

Opportunity cost carries the classic definition of selecting the next best alternative. For example, a furniture maker might want to use mahogany lumber to create a bedroom set. Due to the shortage of local timber producers – i.e. the lack of sufficient mahogany wood for sale – the producer has to use cherry wood instead. Therefore, the opportunity cost is primarily the mahogany wood desired by the furniture maker. Scarcity and opportunity cost can typically be major drivers in choices made due to a company’s inability to continue producing certain goods over the long term.

The two are also present in the lives of individuals in a free market economy. For example, a consumer might want a brand new personal computer with a specific operating system and software components. The only problem, however, is that this computer isn’t widely available, making the item scarce on the cheap. The consumer must find the next best alternative, which represents an economic choice and an opportunity cost. The alternative personal computer will work just fine, but it’s not the consumer’s first choice.

Standard economic theory states that every consumer is a rational individual. Thus, the concept of scarcity and opportunity cost dictates that individuals and businesses will select the next best economic option when necessary. For example, a company cannot select an alternative economic resource when the desired resource is scarce. The company could simply drop production for that particular product. In this option, there is no opportunity cost because society has avoided the next best alternative.

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