Scarcity and choice

No one can produce everything they need. Each person has only a few resources: a piece of land, some tools, a skill, their own labour. A farmer grows wheat, a weaver makes cloth, a teacher teaches (a service). Each uses their resources to produce something, and exchanges it for the other goods and services they need.

But resources are limited, or scarce, compared to what people want. So more of one thing means less of another. A family that wants a bigger house may have to give up some of its farmland. Every choice has a cost.

The same is true for society as a whole: its land, labour, machines and skills are scarce, so they must be allocated (shared out) among the many things people want.

So every economy faces two basic economic problems: how to allocate its scarce resources, and how to distribute the final output among its people. Households and firms are the decision-making units that face these choices.