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Scarcity and Opportunity Cost: Question 4

Syllabus 1.1

Multiple choice 1 mark

A tropical island has abundant sunshine, far more than any resident or visitor could ever want to use, but only a limited number of hotel rooms, which are fully booked every single night of the year.

Which good on this island best illustrates scarcity, in the way economists use the term?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall what “scarcity” means in economics

In economics, a good is scarce when the amount available is less than the amount people would want to consume of it if it had no price. That is, when finite supply falls short of effectively unlimited wants. A good whose supply is so abundant that everyone can have as much as they want, at no cost, is instead called a free good.

Step 2: Apply the definition to sunshine

The island has far more sunshine than anyone could ever want to use. Nobody has to give up any resources to “produce” more sunshine, and no one is prevented from enjoying as much of it as they like. Even though sunshine is highly valued by tourists, its supply is not limited relative to how much people want, so sunshine is a free good, not a scarce one.

Step 3: Apply the definition to hotel rooms

Hotel rooms, by contrast, are fully booked every night: the number of rooms available is fixed, and it falls short of the number of people who would like to stay in one. This is exactly what economic scarcity means, a finite supply that cannot satisfy all the demand for it. Hotel rooms are therefore an economic good, requiring resources (building, staffing, maintaining) to provide, and their scarcity is what allows hotels to charge a price for them.

Step 4: Rule out the other options

  • Options A and B focus on how much tourists value or want sunshine, but value and want are not the same as scarcity: scarcity is about whether supply is enough to meet those wants, and sunshine’s supply is effectively unlimited here.
  • Option D focuses on whether a good is man-made, but that is not what defines scarcity either; a good can be entirely natural (like a fixed supply of fresh water) and still be scarce, while some man-made outputs could in principle be so abundant that they are not scarce at all.

Final answer

Hotel rooms are the good that illustrates scarcity here, because their limited, fully-booked supply cannot satisfy the demand for them, so the correct answer is option C.