Lesson: What Is Economics and Why It Is Important 

The Problem of Scarcity

  • Scarcity means limited resources.
  • Limited resources means not having enough money to buy everything someone wants. Or, it can also mean not having enough resources to provide a family, business, or society what they need.
  • Families choose what they will spend money on and what they can't afford.
  • Companies decide how much they can pay employees. 
  • Governments identify what is most important for them when it comes to spending money.

Think about all the things you consume in your life: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for income. If you do not pay for these things, someone else does so on your behalf. Yet, most of us never have enough income to buy all the things we want. This is because of scarcity. So how do we solve it?

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protect the environment. In most cases, there's just not enough money in the budget to do everything.