The Five (5) Economic Assumptions of Resources
1. Resources are Factors of Production
It is rare that basic resources of labour, capital and natural resources are used for their direct consumption without modifications.
Hence resources are viewed in economics as a means to produce final goods and services that are capable of directly satisfying human wants.
This is to say that basic resources are a means to an end and not end in themselves.
2. Resources have no Intrinsic Value
Related to assumption 1 above is the notion that the economic value of resources is strictly anthropocentric. This implies that the economic value of any resource is defined by human needs and nothing else.
This idea treat human as preeminent as all other resources are deemed to exist for humans economy and not for themselves. Non-economic values of resources are not considered. This has important consequences for the conservation of biodiversity.
3. Only Scarce Resources are of Economic Concern
In economic analysis, each of the above resource categories is of economic concern to the extent that they are scarce i.e found in limited quantities and/or quantities.
Any resources that is not limited in supply is not of economic concern.
4. Resources are Fungible
This implies that resources are substitutable. That is, on kind resources (such as machine) can be replaced by another (such as labour) in the production process; or one type of energy resources (e.g. petroleum) can be replaced by another form of energy (such as natural gas).
Fungibility implies that no particular resource is considered to be absolutely essential for production of goods and services. It should be noted however that fungibility does not in any way suggest an escape from general problem of resource scarcity because there is the extent to which resources substitution can occur in production.
5. Resources are used in Combination
This means that to produce a good or service require that various forms of resources are combined together to effect transformation into the required good or service.
For instance, producing bricks for building requires a combination of sand, water, human skill, cement, block- making machine, shovel etc. in certain proportions.
Resource combination and substitutability can be depicted by the following table. For simplicity, we assume there are just two resources, labour and capital to produce a given level of output.
|Quantity of Output||Quantity of Labour||Quantity of Capital|
Resources can also be classified according to whether they are replenishable or not. Thus we have the following categories.
Renewable Resources: resources are said to be renewable if they are replaced by natural processes at a rate comparable or faster than their rate of consumption by humans. In other words, renewable resources have a natural rate of replenishment sufficient to augment the stock.
Thus, renewable resources naturally regenerates over time e.g. fish, trees, wildlife, grazing lands. The environmental economic issues revolve round the consideration of the impact of a renewable resource use (extraction or harvest) on the rate of replenishment.
Read Also : Challenges in Sustainable Use of Resources and Economic growth
If too much is harvested, the rate of replenishment may not be sufficient to leave enough resources for the future. If too little is harvested, opportunities for gains are lost.
The harvest decision involves a comparison of marginal benefit with marginal cost. If MB harvest > MC harvest, more harvest is justified, otherwise (If MB harvest <MC harvest) further harvest is not advised.
Non-Renewable Resources: these are resources for which there is no replenishment or the rate of growth is so slow as to be imperceptible in human life span. Thus, for non- renewable resource, the natural rate of replenishment is negligible in terms of augmenting the stock of the resource.
Examples include oil, gas, uranium, aluminum e. t. c. The three stages of non-renewable resource use to consider in economics are exploration, development and extraction. The exploration, development or extraction decision also involves a comparison of the marginal benefit to marginal cost.
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