Economic Theory and the Problem of Resource Allocation

The rational of economic theory

Making CHOICES is an every day occurrence. Individuals, households, firms
producing goods and services, governments and even the international community make
choices. Choices have to be made for the simple reason that there is SCARCITY. The bestknown scarcity is that of money to buy all the things we desire as individuals, households,
or even governments.
Time is scarce, therefore we have to make a choice on the way we spend the twenty
four hours in a day. Natural resources are scarce. For instance land in the high potential
areas of Kenya is only a certain area. Similarly the forest area in Kenya is scarce in the sense
we would want to have more forests, but forestland can also be cultivated because food
produced is scarce. Scarcity implies that a choice has to be made.
Economics is the science of choices. It can be defined as the social science that
studies the choices that we (human beings) make as we cope with scarcity (such as of natural
resources) and the institutions (such traditional norms of natural resource use and management
or government regulations (such as the pending forest bill) that have evolved and
continue to evolve to influence and reconcile our choices. Economic theory is the body of
knowledge that has been accumulated by observing human behaviour in the process of
making choices imposed by scarcity. This body of knowledge continues to be generated. It is
used as one way of analyzing some of the problems that face humanity by identifying and
organizing the facts pertaining to a specific problem with a view to suggesting or alternative
solutions and evaluating their possible.
Economics is divided into two broad areas: Micro- and Macroeconomics.
Microeconomics is the study of the choices the individuals (households) and businesses
(firms) in dealing with scarcity, the interaction of these decisions, and the effect of government
regulation on these decisions. The effect of individual, households, business firms
government

on

the

national

and

global

economy constitutes

the

and

study of

Macroeconomics. For example, how will the maize market in Kenya be affected by free trade
among the three East African countries? How will reduction on the tax on paraffin and gas?