Overview

The relationship between economics and scarcity

Why scarcity necessitates choice The importance of opportunity cost Making decisions on the margin In class activity

Defining Economics

Economics: a social science that examines how people choose among the alternatives available to them. Without scarcity, there would be no need for

economics. Scarcity requires that we make choices

among alternatives. Economics helps us understand how society,

individuals, and companies make decisions about limited (scarce) resources.

Economic Approach to Decision Making

Because of scarcity, people must make choices consider opportunity cost pursue their self-interest

Scarcity Forces People to Make Choices

Scarcity: a limited availability of something that does not satisfy all wants. This limited availability requires that choices be made among scarce alternatives. A scarce good is something that when chosen, requires

that you give up other alternative choices/options. For example, if you spend your money on a new phone, you give up everything else that you could have purchased (like a computer). With scarce goods, you can’t have your cake and eat it too – you must make a choice.

A free good is something that when chosen, does not require that you give up other alternative choices/options. For example, if you take a breath of fresh air, you didn’t have to give anything else up.

Scarcity Choice

The following choices have to be madeby society

Tax policy, government programs, etc. by individuals

What to purchase? Where to live?by companies

What to produce? How to produce it?

Scarcity Makes Opportunity Cost Important

Opportunity cost: the value of the best alternative that is given up when making a choice.

For example, the opportunity cost of going to college is the money spent on

tuition, fees, books, and lost wages.owning your business are the wages you

could have earned being an employee for someone else

spending your money is the income you could have earned from investing it

Scarcity, Self-Interest, and Society

Adam Smith (1723-1780) recognized that voluntary transactions benefit both buyers and sellers. Because these transactions are being driven by self interest, they must maximize the well being of those involved, and therefore society.

Choices on the Margin

Choices at the margin: choosing to do a little bit more (or less) of something.

For example, each of the following would represent marginal choices Eating 12 potato chips instead of 10 chips

(+2 chips) Sleeping for 7 hours instead of 8 hours (-1

hour) Spending $400 a month on restaurant meals

instead of $550 (-$150)

Choices on the Margin

If someone is allocating their resources (time and money) in the best possible way, it should be impossible for them to reduce one behavior and use these newly available resources in a way that makes themself better off.

For example, if you spend your dinner budget on two hamburgers, you are wasting resources. Most people would rather eat just one hamburger, and use their remaining money to buy fries and a soda.

You Try It!

Scenario: You just graduated from college and

started a new job that pays $45,000 per year. The following budget shows your current discretionary income after paying 35% in payroll deductions (taxes, social security, benefits, etc.).

GOAL: Use the economic approach to decision making to increase your savings to $10,000, for the down payment on your first home.

You Try It!

Budget Original Improved

Monthly Income (take home pay)

$2,437.50

Less Monthly Expenses

Housing $800

Food $400

Student Loans $250

Credit Cards $200

Insurance, Charity, Emergency Fund

$300

Utilities, Internet, Cable, Water

$200

Clothes, Cell phone, Entertainment

$250

Total Monthly Expenses $2,400

Cash surplus/deficit per month

$37.50

Years it takes you to safe $10,000

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