AP Microeconomics

## Scarcity and trade-offs **Scarcity** is the gap between what people want and what can be produced with the resources available. Wants have no natural limit, while the land, labor, equipment and time that satisfy them do, so every society has to give up some things to get others. A trade-off exists whenever choosing one use of a resource means not using it for another, and the value of the best alternative given up is the **opportunity cost** of the choice. Scarcity applies to individuals, firms and governments alike. A student with one free evening cannot both study and work a shift; a firm with a fixed budget cannot both build a new plant and buy a rival; a government that spends tax revenue on roads has less to spend on schools. Being rich does not remove scarcity, because time and the number of goods anyone can enjoy remain limited. ## Resources and factors of production **Resources** are the inputs used to produce goods and services, and they are grouped into factors of production. | Factor | What it is | Payment it earns | |---|---|---| | Land | natural resources: ground, water, minerals, forests | rent | | Labor | the physical and mental effort of people | wages | | Capital | goods made to produce other goods: machinery, buildings, tools, computers | interest | | Entrepreneurship | organizing the other factors and taking the risk of starting a business | profit | Capital in economics means physical capital of this kind. Money used to buy it is financial capital…