Ans. Scarcity is the most fundamental economic problem. Human desires are limitless, but resources to satisfy these desires are limited, and these limited resources can be used in other ways. The term ‘scarcity of resources’ implies that there are unlimited wants to be satisfied by limited resources, resulting in a lower supply of resources compared to the demand for them. For example, an economy with a certain level of resources must choose between producing capital goods and producing consumer goods. The economy’s choice (i.e., what to produce and in what quantities) is determined by the economy’s needs. While the production of consumer goods will impede the country’s capital formation for future production, the production of capital goods will not provide enough goods for consumption by the current population.
Individuals can experience the same scarcity problem. For example, with a given sum of money, say 10,000 Rupees, one cannot buy a refrigerator and a washing machine at the same time. As a result, the individual must choose between the alternatives based on his or her priority.