Chapter 2 Scarcity, Choice, Opportunity Cost and Allocation of Resources: Class 10 Economics | SEE Guide

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Class 10 Economics

Chapter 2 Scarcity, Choice, Opportunity Cost and Allocation of Resources

For SEE board exam preparation: Detailed theoretical concepts and fully solved exercise questions

Welcome to the complete guide on Chapter 2 Scarcity, Choice, Opportunity Cost and Allocation of Resources. This is Chapter 2 of Class 10 Economics for students preparing for their SEE board exams in Nepal.

Here you will find structured theory notes, conceptual explanations of scarcity and choice, along with clear and accurate solutions to all CDC textbook exercises.

Looking for more study materials? Explore our full collection of Class 10 Economics Notes.

1. Theoretical Concepts

Introduction to the Chapter

Scarcity, choice, and opportunity cost are the most fundamental and foundational concepts in economics. Scarcity refers to the situation in which the resources and means available to satisfy human needs are always limited or insufficient. Because of this limitation, people are forced to prioritise and select the most relevant and important needs from among their unlimited wants — this process of selection is called choice. Due to the scarcity of resources, fulfilling one best need requires giving up the next best alternative, and the value of that sacrificed alternative is known as opportunity cost. In this chapter, we will discuss these interrelated economic issues and the efficient allocation of a country’s available resources.

(A) Scarcity

Human needs and desires are unlimited and endless in nature. However, the productive resources (such as time, capital, land, raw materials, etc.) needed to satisfy those unlimited wants are always available only in limited or insufficient quantities. This situation — where the supply of resources falls short compared to demand — is called scarcity. Scarcity is not just the problem of a single individual or family; it is a shared challenge faced by all of society and even governments.

Definition by N. G. Mankiw:
Scarcity refers to the situation in which society has limited resources and therefore cannot produce all the goods and services that people wish to have.

Viewpoint of Stonier and Hague:
If there were no scarcity of resources in the world, no economic system would be necessary and the subject of economics would never have come into existence.

(B) Choice

The act of selecting the best or most useful option from among several available alternatives is called choice. Because human wants are unlimited but the means to satisfy them are limited, people are required to rank and prioritise their needs and decide which ones to fulfil first.

Definition by Paul A. Samuelson:
Because resources are scarce and wants are unlimited, every society must make choices about what goods to produce, how to produce them, and for whom to produce them.

Relationship Between Scarcity and Choice (Visual Representation):

Unlimited Wants

Limited Resources

→

Scarcity

→

Problem of Choice

(C) Opportunity Cost

The means of production are not only scarce but also have alternative uses. When we choose one option, we must give up the benefit or return that could have been received from the next best alternative. The value or potential income of that foregone second-best alternative — the one that was sacrificed when making a choice — is called opportunity cost.

Definition by R. G. Lipsey:
The opportunity cost of any activity is the value of the next best alternative that must be given up in order to undertake it.

Example:
A farmer named Jagman owns a piece of land. He can earn Rs. 90,000 by growing wheat on it, or Rs. 80,000 by growing potatoes. Since the land is limited, he cannot grow both at the same time. If he chooses to grow wheat (the more profitable option), he must sacrifice the potential income from growing potatoes. Therefore, the opportunity cost of growing wheat is Rs. 80,000 — the income he gives up by not growing potatoes.

(D) Allocation of Resources

The process of wisely dividing and deploying the limited factors of production available in an economy — namely land, labour, capital, and organisation — across various productive activities so as to maximise the satisfaction of human needs and the welfare of society is called allocation of resources.

When allocating resources, every economy must confront three fundamental economic questions:

What to Produce? Using the available limited resources, which goods or services should be produced and in what quantities? For example, should priority be given to producing food grains or luxury goods?
How to Produce? Which technique or method of production should be used? There are two main approaches:
- Labour-Intensive Method: A method in which human labour is used more extensively compared to capital or machinery. This is useful in countries with large populations, as it helps generate employment.
- Capital-Intensive Method: A method in which modern machines, tools, and equipment are used more extensively compared to human labour. This is useful for reducing costs and producing in large volumes.
For Whom to Produce? This involves deciding which class, community, or group of people the produced goods and services should be distributed to, so as to ensure social fairness and justice.

2. Exercise (With Solutions)
Very Short Answer Questions [1 Mark]

a. What is scarcity?

Answer: The situation in which the resources and means required to satisfy unlimited human needs are limited or insufficient in supply is called scarcity in economics.

b. Give one example of scarcity.

Answer: When the government wishes to fulfil all the development demands of the people (such as constructing roads, hospitals, and schools) at the same time, but does not have sufficient budget (financial resources) to do so, this is a clear example of scarcity.

c. Define choice.

Answer: The process of selecting the best alternative from among several available options, or deciding on a priority basis which needs to fulfil first using limited resources, is called choice.

d. Write any two reasons why choice has to be made.

Answer: The two main reasons why choice must be made are:

Human wants and needs are unlimited.
The resources available to satisfy those wants are limited (scarce).

e. How does an economic problem arise?

Answer: Because human wants are unlimited while the resources available to satisfy them are both limited and have alternative uses, people face the dilemma of which needs to prioritise — and this very dilemma of choice gives rise to the economic problem.

f. What is opportunity cost?

Answer: The value or potential return of the second-best alternative that is given up or sacrificed when choosing one particular option over another is called opportunity cost.

g. What is meant by allocation of resources?

Answer: The efficient, maximum, and economical deployment of the available limited productive resources across various production activities in order to satisfy as many human needs as possible is called allocation of resources.

h. Give one example of the labour-intensive method of production.

Answer: Instead of using a modern tractor (machinery) to plough fields in agricultural work, employing a large number of farm labourers (human labour) to complete the task is an example of the labour-intensive method of production.

i. What is the capital-intensive method of production?

Answer: A method of production in which modern machines, tools, automated equipment, and other capital technologies are used extensively — far more than human labour — in producing goods and services is called the capital-intensive method of production.

3. Short Answer Questions [5 Marks]

a. Clarify the concept of scarcity with an example. 5 Marks

Human desires and needs are always unlimited in nature — they never truly come to an end. However, the resources and means needed to satisfy those desires (such as money, time, natural resources, etc.) are always available only in insufficient quantities in the market or in nature. This economic situation — where the availability of resources falls short compared to the level of demand — is known as scarcity.

According to economist N. G. Mankiw, scarcity means that society has limited resources and is therefore unable to produce all the goods and services that people desire in adequate quantities.

For example: A student may wish to go to the market and buy both a new notebook and a new pair of shoes. However, if they only have Rs. 500 and that amount is not enough to buy both items, this is a situation of scarcity — the student’s available money (resource) falls short of their total wants. This problem is not limited to individuals; even governments face it, because a country’s budget is never sufficient to address all the wishes and demands of the people at the same time.

b. What is choice? Write the reasons why the problem of choice arises. 5 Marks

The decision-making process of selecting the best alternative on a priority basis — determining which needs to fulfil first and which to defer later — using the available limited and alternatively usable resources, is called choice.

The main reasons why the problem of choice arises are as follows:

Unlimited Human Wants: Human desires and needs are infinite. As soon as one need is fulfilled, a new one immediately emerges in its place.
Limited Resources: The means of satisfying those needs — land, labour, capital, and technology — are always available only in limited quantities.
Alternative Uses of Resources: The limited resources available can be applied to many different activities (for example, a piece of land could be used to build a school or to grow crops). Therefore, a decision must be made as to which alternative the resources should be directed towards.

c. What is opportunity cost? Verify with an example. 5 Marks

Because resources are scarce, choosing one option always means giving up another. The potential income or value of the second-best alternative that is sacrificed or foregone when a particular decision or option is chosen is called opportunity cost.

Verification through an example: Suppose a farmer named Jagman owns one piece of agricultural land. He can earn Rs. 90,000 by growing wheat or Rs. 80,000 by growing potatoes on the same land. Since his land is limited, he cannot grow both crops at the same time. If he chooses to grow wheat — the more profitable option — he must give up the potential income of Rs. 80,000 that he could have earned from potatoes. Here, the income foregone from potato farming (Rs. 80,000) is the opportunity cost of choosing to grow wheat. In this way, opportunity cost helps measure the efficient utilisation of scarce resources and reminds decision-makers of the true cost of every choice they make.

4. Long Answer Questions [8 Marks]

1. (a) Verify: “Scarcity is the root cause of all economic problems.” 8 Marks

When we trace the origin of all the economic difficulties and policy challenges visible in human society, we invariably arrive at a single point — the insufficiency of resources, that is, scarcity. It is the imbalance between unlimited human needs and the limited productive resources available to meet them that gives rise to all economic problems in an economy.

If all resources in this world — such as capital, land, petroleum, and technology — were available freely and in unlimited quantities for everyone, just like air and sunlight, then no one would ever need to pay a price for any commodity. Every human desire would be fulfilled instantly, and there would be no need for any economic activity or decision-making process whatsoever. As economists Stonier and Hague put it: if there were no scarcity, no economic system would be necessary and economics as a subject would never need to exist.

It is precisely because resources are scarce that:

An individual must think carefully about how to allocate their limited income among competing needs.
A business must decide which goods to produce with limited investment in order to earn the highest possible profit.
A government must struggle over which development plan — education, healthcare, or infrastructure — to give first priority to, given a limited national budget.

It is scarcity that creates the three fundamental economic problems: “What to produce?”, “How to produce?”, and “For whom to produce?” Since no economic problem can ever arise in the absence of scarcity, we can firmly conclude that “scarcity is indeed the root cause of all economic problems.”

2. (b) Explain the statement: “Economics is the science of choice.” 8 Marks

Economics is fundamentally regarded as a social science that studies human behaviour and the economic decisions people make. The means by which a balance is struck between unlimited human wants and the scarce resources available to satisfy them is choice. For this reason, economics is essentially described as the “science of choice.”

The means of production are not only scarce but also have alternative uses. For example, the time we have available can be spent either studying or on entertainment, but both cannot be done simultaneously. In such a situation, a person must select the best possible option from among the available alternatives in order to maximise their satisfaction and well-being.

According to economist Paul A. Samuelson: “Because resources are limited and wants are unlimited, every society must make choices about what goods to produce, how to produce them, and for whom to produce them.”

Every individual, organisation, and nation must adopt the process of choice in order to make the most efficient and economical use of available scarce resources and thereby maximise overall welfare. Economics guides us in solving this very problem of choice in a scientific and rational manner. If there were no compulsion to choose, the relevance of this entire subject would cease to exist. Since economics scientifically analyses the process of human choice and decision-making under conditions of scarcity, it is entirely correct and logical to say that “Economics is the science of choice.”

3. (c) Introduce the allocation of resources and describe in points the aspects related to the allocation of resources. 8 Marks

Introduction to Allocation of Resources:
In any economy, the available limited factors of production — land, labour, capital, and entrepreneur — must be intelligently and efficiently divided and deployed across various sectors, industries, and goods in order to fulfil the maximum number of human needs. This process of wise division and deployment of scarce resources is called allocation of resources.

Key Aspects Related to Allocation of Resources (Fundamental Economic Problems):
When allocating limited resources, every economic system must confront three fundamental aspects, which are described below:

1. What to Produce?
Since available resources are insufficient to meet all the needs of society at once, the first aspect involves deciding which goods or services should be produced and in what quantities using the limited resources at hand. A choice must be made between producing essential goods for society (such as food grains and medicines) or luxury goods (such as motor vehicles). Proper prioritisation at this stage ensures that the most urgent social needs are addressed first.
2. How to Produce?
This aspect relates to the choice of technique or method used for producing goods and services. There are two main methods:
- Labour-Intensive Method: A method that makes extensive use of human labour compared to capital or machinery. This is particularly useful in countries with large populations, as it helps create more employment opportunities.
- Capital-Intensive Method: A method that makes extensive use of modern machines, tools, and equipment compared to human labour. This is useful for reducing production costs and producing goods in large quantities efficiently.
3. For Whom to Produce?
This aspect relates to the equitable distribution of the goods and services that have been produced. Since society comprises people from various economic backgrounds — both wealthy and poor — a decision must be made about which class or community the output should be directed towards, so that social equality and justice can be upheld. This ensures that the benefits of production reach those who need them most, rather than being concentrated only among the privileged few.