Scarcity & Choice

Chapter 1

EconomicsEconomicsStudy of how people and countries make

decisions about the use of their scarce resources in the most efficient way.

Economy. . .

. . . The word economy comes from a Greek word for “one who manages a household.”

•What to produce?

•How to produce it?

•For whom to produce?

Scarcity & Choice

Needs• Water• Food• Clothing• Shelter• Essential to KEEPING PEOPLE ALIVE

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Wants• Things we don’t need but that may makeour lives better.

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Value and Scarcity

• Scarcity = the basic economic problem

• Scarce = has value & short supply

• Example: Oil vs. Sand?

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• I asked Sarah for a double scoop of my favorite kind of ice cream: mint chocolate chip. “I am sorry Huey, we are all out of that flavor”, she said. Disappointed, I settled for vanilla.

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• Sarah asked me if I would like my vanilla ice cream in a cup or a cone. I asked for a cone. Sarah said I was lucky because there was only one more cone available. The little boy behind me in line wailed, “I wanted my ice cream in a cone!” I told Sarah that he could have the last cone, and that I would have mine in a dish with chocolate syrup.

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What is supply and demand?• The supply of mint

chocolate chip ice cream at “Bubba’s” was gone because it was in high demand (wanted) by many customers. Look at the chart on the left to see what flavors are in supply at “Bubba’s Ice Cream”.

0102030405060708090

100

Gallons

vanilla choc. straw. mintchoc.

Flavors

• There was a scarcity of cones at Bubba’s. Scarcity means that there are limited resources, and therefore, people must make choices. Look at the pictures on the right. Which pictures show a scarcity?

1)

2)

3)

• Yesterday, when I was walking through town, I decided to go to “Bubba’s Ice Cream”. My friend Sarah works there. Sarah provides a service to me because she serves me ice cream. A service is any kind of work performed for others for a fee. The ice cream is a good. A good is something you can feel, or any kind of merchandise that’s manufactured.

Bubba’s Ice Cream

• Look at the pictures on the right. Which of these pictures show goods and which ones show services?

1)

2)

3)

4)

4 FACTORS OF PRODUCTION• Natural ResourcesLand, minerals, etc.• Human ResourcesLabor • Capital ResourcesBuildings, Tools, Machines• Entrepreneurship People that start New Businesses

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Resources• Labor- The work done by individuals• Capital - machines,buildings, tools &

money • Natural Resources - raw materials

water,minerals & land

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What is an entrepreneur?

• Anne is an entrepreneur. An entrepreneur is a person who comes up with a product or service, or a better way to produce one. They find the resources, the money, and the time to produce new products.

• I wished Anne good luck and continued on my way. On the next two blocks were two popcorn stands. They both lowered their prices!

What is free enterprise?• Both popcorn stands

lowered their prices because of free enterprise. Free enterprise means competition. Companies compete with one another to get the most customers, and therefore, make the most money. I decided to buy popcorn from the first popcorn stand, because their price was the lowest.

Popcorn

$0.50---Now $0.25!

Popcorn $0.50---Now $0.30!

Henry Ford• In October, 1913 a revolutionary step was taken in the advancement of factory assembly when Henry Ford unveiled his moving assembly line which made production faster.

Weighing Costs and Benefits• Model = simplified view, graph, helps

understand real world (more complicated) They also assume some factors WILL

NOT CHANGE• Production Possibilities Curve = helps

maximize productivity• Applying Models to Real LifeSimplistic-not all factors clear picture of opportunity cost nothing more

Making Choices• Trade-off: choosing one

thing over another

• Opportunity Cost: cost of choosing one thing over another; you give up the next best option.

• The Goal of economic decision making is to maximize resources

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What is opportunity cost?• Omar had $65.00

to spend at the toy store. The basketball net cost $50.00, so he had to buy that instead of the skateboard, which cost $75.00.

• Zainib had enough money for either the rabbit or the bike. She decided to buy the bike because then she could ride bikes with her friends after school.

When we were finished getting ice cream, “Where are you two going?”

• The boy, whose name was Omar, answered: “We’ve saved up all our money and today we are going to the toy store! My sister Zainib wants to buy either a rabbit or a bike and I want to buy either a basketball net or a skateboard”.

Toy Store

• Trade-off is the process of choosing one good or service over another. The item that you don’t pick is the opportunity cost. The rabbit is Zainib’s opportunity cost and the skateboard is Omar’s opportunity cost.

Opportunity Costs

Purchases

Principle #1: People Face Tradeoffs.“There is no such thing as a free lunch!”

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Principle #1: People Face Tradeoffs.To get one thing, we usually have to give up another thing. The opportunity cost of an item is what you give up to obtain that item.

– Whether to go to college or to work?– Whether to study or go out on a date?– Whether to go to class or sleep in?– Guns v. butter– Food v. clothing– Leisure time v. work– Efficiency v. equity

Principle #2: The Cost of Something Is What You Give Up to Get It.

Actor and rap star Will Smith chose to skip college (M.I.T.) and go straight from high school to the music and film industry where he has earns millions of dollars.

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Principle #3: People Face Tradeoffs

• Efficiency v. Equity– Efficiency means society gets the most that it

can from its scarce resources.– Equity means the benefits of those resources

are distributed fairly among the members of society.

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

BY1

X1

Assume a country can produce two types of goods with its resources – capital goods and consumer goodsIf it devotes all resources to capital goods it could produce a maximum of Ym.

If it devotes all its resources to consumer goods it could produce a maximum of Xm

Ym

Xm

If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods

If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods.

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

.B

CY1

X1

Production inside the PPF – e.g. point B means the country is not using all its resources

It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.

• This completes my lesson on economics! I hope you enjoyed the tour. Economics is an important part of our lives. Think of all of the ways you use economics everyday!

THE END