ECONOMICSWhat does it mean to me?

Part II:• Scarcity• Opportunity cost• Supply & demand

The essential question in

Economics is:

Scarcity

Scarcity:Insufficient supply of something

where “insufficient” is interpreted relative to the desires of a group of people.

For instance, antiques are valued for their scarcity….

1.) Everything we want is not freely available from nature. We have unlimited wants and limited resources.

2.) Everyone must give up something to get more of other things, called trade-

offs.

3.) It takes resources to get “things.” Those resources could be used to make “other

things.”

4.) In market settings, goods have positive prices.

x

Quadrant I

y

Quadrant IV

Quadrant II

Quadrant III

Economists generally use quadrant 1 to graph their equations.

5.) For public policies as well as private decisions, there can be NO benefits without

costs.

Some economists argue that we are worse off because of the FDA (Food and Drug Administration).

What are the “costs” of having a government administrative agency control the food and

drugs a society can consume?

What are the advantages of government imposed speed limits on public highways?

What are the “costs” to you of having your speed

limited?

Scarcity is NOT:• the same as poverty. (eg. Goods can be

scarce in United States AND Somalia. However, scarcity isn’t going away; poverty might.)

• the same as shortage. (eg. Whether you have a shortage or not depends upon how you handle the rationing problem made necessary by scarcity)

If I have 5 CDs to give away, how should we decide to ration them?

• Contest

• Force

• Lottery

• Auction

• Age

• Strongest

• Government decree

• Barter

In a market economy, PRICE is

the mechanism used to ration goods.

• Share equally

• Survival of the fittest

• Arbitrary decision

• Random selection

• Vote• Blackmail• Scavenger Hunt

• Wait in line

What if those incentives changed?

So……you’ve made a decision--what incentives affected it?

When P = cost of doing A

(When the PRICE goes UP, the cost of doing ANYTHING goes

UP)

100 200 300

QUANTITY

PRICE

$30

$20

$10

Never say “need” or “can’t afford. Everyone

can afford anything...they just

make choices…..NEED: At the price I face and the amount I can afford, I want

it…..

This “choice” must be among alternatives. If

there is no alternative or if you “can’t choose” for

some reason, then it is not an economic problem.

Scarcity implies that

CHOICES must be made.

• Sleep• Food• Drink• Education

• Intimacy

• Sports• TV• Music

Most cho

ices

(not all

…but

many) ar

e of the

“little

more” or

“little

less”

variety,

rather

than the

“all or

nothing”

variety.

It is marginal benefits and costs that matter.Margina

l benefits fall with

quantity.

QUANTITY

P

R

I

C

E

Opportunity Cost:

The next best alternative given up to

get something.

Things haveprices...

Decisions have costs…..

ALL ACTIVITIES HAVE COSTS

(School, date, consumer decisions, producer decisions,

etc.)

BECAUSE OF SCARCITY

Marginal costs rise with quantity--since marginal

benefits fall with quantity, we stop doing things at some

“best” amount.

How this looks on a graph: MC (marginal cost)

MB (marginal benefit)

(Food, sleep, date, study, etc.)

A too little A* A too highQUANTITY

P

RI

CE

SUPPLY

DEMAND

EQUALIBRIUM

In the 1970s,

President Jimmy Carter said that

the bicycle was the most efficient means of

transportation.

What did he mean?

FULL costs matter (not a

portion or just money).

Costs are subjective…..like

benefits.This means that costs and benefits are particular to a given person…..they exist only in each individuals’

mind.

Jodi Foster went to Yale

University at a time when she had a big movie career.

What were her costs? benefits?

Costs must be in the future, since they come from

current decisions.“Sunk” costs and

“historical” costs don’t matter…..they are

irrelevant to current decisions.

For example: Those who died in Vietnam are “sunk” costs.

Let’s look at the graph again:

MC (marginal cost)

MB (marginal benefit)(Food,

sleep, date, study, etc.)

A too little A* A too highQUANTITY

P

RI

CE

S (supply)

D (demand)

E (equalibrium)

This graph also illustrates two economic laws:

LAW of SUPPLY

LAW of DEMAND

LAW of SUPPLY states that producers are willing and able to produce more of a good as its price rises.

MC (marginal cost)

(Food, sleep, date, study, etc.)

QUANTITY

P

RI

CE

S (supply)$8

0

$70

$60

$50

$40

$30

$20

$10

0

100 200 300 400 500 600

LAW of DEMAND states that consumers are willing and able to consume less of a good as its price rises.

MB (marginal benefit)

(Food, sleep, date, study, etc.)

QUANTITY

P

RI

CE

D (demand)

$80

$70

$60

$50

$40

$30

$20

$10

0

100 200 300 400 500 600

Putting these two curves together gives us the point

of EQUALIBRIUM

(Food, sleep, date, study, etc.)

QUANTITY

P

RI

CE

S (supply)

D (demand)

E (equalibrium)

$80

$70

$60

$50

$40

$30

$20

$10

0

100 200 300 400 500 600

In a market economy, the price of a good signals to consumers the cost of producing a good.

MARKET PRICE also signals to producers the value that

consumers place on a good. Market price coordinates the

actions of consumers (demand) and producers (supply).

What happens when

changes occur in

the economy?

How do these changes affect

supply and demand?

Does this example affect the supply curve or the demand

curve?

This month the government expects 100,000 immigrants to enter the U.S.

Chart I: Demand increase (P ; Q )

QUANTITY

P

RI

CE

S

D0

E0 P0

Q0

P1

E1

This month the government expects 100,000 immigrants to enter the U.S.

D1

Q1

Gas prices increase

dramatically. What

happens to the market for big

automobiles?

Does this example affect the supply curve or the demand

curve?

Chart II: Demand decrease (P ; Q )

QUANTITY

P

RI

CE

S

E0 P0

Q0

P1

Q1

E1

Gas prices increase dramatically. What happens to the market for big automobiles?

D0 D1

Plentiful oil fields are

discovered in Nevada. What happens to the market for oil?Does this example affect the supply curve or the demand

curve?

Chart III: Supply Increase (P ; Q )

QUANTITY

P

RI

CE

S0

D

E0 P0

Q0

P1

Q1

E1

Plentiful oil fields are discovered in Nevada. What happens to the market for oil?

S1

A drought has depleted the

corn crop. What happens to the

market for corn?Does this example affect the supply curve or the demand

curve?

Chart IV: Supply Decrease (P ; Q )

QUANTITY

P

RI

CE

S0

D

E0 P0

Q0

P1

Q1

E1

A drought has depleted the corn crop. What happens to the market for corn?

S1

The End

Compiled by Virginia H. Meachum Coral Springs

High School