Scarcity and opportunity cost represent two interlinking concepts in economics as companies must often choose among scarce resources. In most cases, economic resources are not completely available at all times in unlimited numbers, so companies must make a choice about which resources to use during production. The opportunity cost represents the alternative given up when choosing one resource over another. These two concepts have a direct link because, for example, companies may use a lower quality but more available resource for producing goods.
Choice is among the most common activities in an economy. Both individuals and companies must decide what items to use when filling the needs and wants inherent in all parties in an economy. Scarcity can force choices as resources begin to deplete. For example, a lumber manufacturer may need to make a choice about which timber to harvest as some species become unavailable.
Opportunity cost carries the classic definition of selecting the next best alternative. For example, a furniture manufacturer might want to use mahogany lumber to make a bedroom set. Due to the scarcity at local lumber manufacturers — that is, the lack of sufficient mahogany wood for sale — the manufacturer must use cherry wood instead. Therefore, the opportunity cost is the mahogany wood the furniture manufacturer desired in the first place. Scarcity and opportunity cost can typically be the biggest drivers in choices made due to the inability of a company to continue producing certain goods in a long-term manner.
The two are also present in the lives of individuals in a free market economy. A consumer, for example, might want a brand new personal computer with a specific operating system and software components. The only problem, however, is that this computer is not widely available, making the item scarce in economic terms. The consumer needs to find the next best alternative, which represents an economic choice and opportunity cost. The alternative personal computer will work just fine, but it is not the consumer’s first choice.
Standard economic theory states that each consumer is a rational individual. Therefore, the concept of scarcity and opportunity cost dictates that individuals and companies will select the next best economic option when necessary. For example, a company may not select an alternative economic resource when the desired resource is scarce. The company could simply forgo production on the particular product. In this option, no opportunity cost exists because the company avoided the next best alternative.
