The Economic Problem: Scarcity and Choice

Economy is derived from two Greek words which mean house and distribute. Economy was studied to understand the management of a household that later started being used to manage resources.

basic problem of economy

The chart shows the basic problem of economy

The basic problem of an economy deals with the needs and wants of a man being unlimited and the resources are scarce. The resources include the factors of production that are land, labour, capital and entrepreneurship.

factors of production

The factors of production

Economics is the social science that studies how people use their scarce resources to satisfy unlimited needs and wants. From a teenager to a homemaker and then to a businessman all face the same issue of how to spend their income to attain maximum satisfaction.

the economic problem


The purpose of production is to satisfy one’s want but as the resources are limited, not enough output is available to fulfil every man’s want. This explains that human wants are unlimited which are not fulfilled by the limited resources as stated by the Law of scarcity.

scarcity of resources

This chart shows how law of scarcity arises

The demand is high as compared to the supply, and due to insufficient resources satisfaction is not achieved. To overcome this, the choice is made available to man to allocate their resources in such a way that maximum satisfaction can be achieved.

For instance, a man walks into a grocery store with ₹500, he would buy products in a way that when he walks out the products with him would be equal to the value of ₹500. He might want food grains, toiletries, milk, cooking essentials, etc but he would allocate the money available to him in such a way that he attains maximum satisfaction from his purchase.


Scarcity gives rise to the economic problem of choice. As there are limited resources, the choice is given to decide what one wishes to get by sacrificing one of its demand. When the choice is made there is sacrifice involved in it. The decision to consume a product also means a decision to not consume another. One product can only be consumed by giving up something in exchange. Opportunity Cost refers to the cost of sacrifice that is done to choose the next best alternative.

problem of choice

To Exemplify, a farmer has 10 acres of land he has a choice to either grow wheat or cotton on it. The limited land is a scarcity of the resource. The alternative crops wheat and cotton show how we have choices. To grow one of the two crops the other crop’s production has to be sacrificed, this is the opportunity cost involved.

Production Possibility Curve (PPC) gives a graphical representation of how two alternatives can be used in combination to achieve maximum satisfaction.

ppc curve of choice

The PPC curve shows how more of product X means less of product Y

The above PPC curve shows different possible points of attaining satisfaction. Points A and B give two different combinations. At point A, X8 and Y10 goods are produced and at point B X12 and Y7 goods are produced. To produce more of product X, Product Y is to be produced less this is seen at point B, X12 goods are produced only when good Y is decreased to Y7. This shows that more and more of good X is to be produced only when good Y is sacrificed at its place. A choice needs to be made as to what amount of a particular good can be produced to get the maximum satisfaction from the available resources.


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