Scarcity and Opportunity Cost: Question 7

Worked solution

Part (a): Needs versus wants

Rent and groceries are needs: they are essential for the household’s survival (shelter and food), and the household must cover them before anything else. There is a limited, fairly fixed amount that needs to be spent on them each month.

A want, by contrast, is anything a person or household would like to have beyond what is strictly necessary to survive. The games console is a want: nobody needs a games console to live, but the household would enjoy owning one. Wants, unlike needs, are treated in economics as effectively unlimited, since satisfying one want (like buying the console) does not stop new wants from appearing later.

Part (b): Why the economic problem persists with $150 left over

It might seem that, once rent and groceries are paid, the household has “solved” its economic problem for the month. But the $150 remaining is still a finite sum of money. The household could use it to fund the holiday savings, buy the games console, or spend it on something else entirely, and these competing uses, taken together, are worth more to the household than the $150 it actually has.

Because this finite amount of leftover income still cannot satisfy every want the household has for it, the basic economic problem, finite resources set against unlimited wants, continues to apply. Having covered its needs does not remove the economic problem; it simply moves the same problem of choice to a smaller amount of money and a narrower set of alternatives.

Part (c): The opportunity cost of buying the games console

The household’s $150 is a fixed, limited amount: once it is spent on the games console, it is no longer available for the holiday fund. By choosing the games console, the household gives up the opportunity to add that $150 to its family holiday fund instead.

This forgone contribution, not simply “$150” restated, is the opportunity cost: the $150 itself would have been spent either way, so what is genuinely sacrificed is the specific alternative use, the extra money towards the family holiday, that the household no longer has.

Final answers

• (a) A need (rent, groceries) is essential for survival and limited; a want (the games console) is anything additionally desired and, in effect, unlimited.
• (b) The $150 left over is still a finite sum relative to the household’s several competing wants for it, so the basic economic problem continues to apply even after needs are covered.
• (c) The opportunity cost is the contribution to the family holiday fund that the $150 could have made instead of buying the games console.