Fundamental concepts in economics

People want more things than the world can make

Markets exist because people want to consume more stuff than can be physically made with the world’s resources. The difference between this unlimited demand and limited supply of stuff is what economists call scarcity. And for no good reason they also refer to it as the basic economic problem. 

Because of scarcity, people have to choose what they want to buy. When you buy one thing, you are choosing not to buy another thing. Economists call this opportunity cost. 

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For instance, if a firm has £100,000 to invest, and it chooses to spend it all on new equipment, it forgoes the opportunity to hire new employees.

Scarcity arises when material human demand outweighs the amount of resources needed to fulfil it. Consumers, producers and the government therefore have to make choices over what to, consume, product, or allocate –  this is the basic economic problem.

Opportunity Cost: The value of the next best alternative.