ScarcityScarcity

We experience scarcity We experience scarcity because:because:

Wants are Wants are unlimited.unlimited.

Resources, Resources, however however are limited.are limited.

What resource is most What resource is most scarce for you?scarce for you?

Well, for Well, for me it’s me it’s time!time!

How would How would life be life be different if different if you had 6 you had 6 more hours more hours every day?every day?

How do we cope with How do we cope with scarcity?scarcity?

We make We make choiceschoices

How do we choose?How do we choose?

Economists Economists assume that assume that people make people make rational choices rational choices that they believe that they believe will benefit them.will benefit them.

Is that actually Is that actually true?true?

Not always, we make many Not always, we make many irrational choices.irrational choices.

But more often than not, But more often than not, people act in their own people act in their own

interestinterest The Evolutionary argument: If they The Evolutionary argument: If they

don’t, they don’t survive for long.don’t, they don’t survive for long. This was true for all living creatures.This was true for all living creatures. It’s also true for people running It’s also true for people running

businesses or investing in the stock businesses or investing in the stock market.market.

It’s also impossible to predict irrational It’s also impossible to predict irrational behavior; people might do anything if behavior; people might do anything if they’re not acting in their best interest.they’re not acting in their best interest.

Rational decision making Rational decision making involves weighing costs involves weighing costs

against benefits.against benefits. Costs: Costs:

Resources we Resources we expend to expend to gain gain something.something.

Benefits: Benefits: Satisfaction Satisfaction of our wants of our wants or needs.or needs.

Even when it’s not easy to Even when it’s not easy to see how benefits outweigh see how benefits outweigh

costs, analysis usually costs, analysis usually reveal rationalityreveal rationality

How much How much should we should we be willing to be willing to spend for spend for athletic athletic shoes?shoes?

What are What are the costs?the costs?

The The benefits?benefits?

Should you spend more time Should you spend more time deciding what candidate to deciding what candidate to vote for or what car to buy?vote for or what car to buy?

What’s more What’s more important?important?

How much How much impact do impact do you have on you have on the election?the election?

On the On the decision decision about the about the car?car?

Sometimes we weigh Sometimes we weigh benefits to ourselves benefits to ourselves

against costs imposed on against costs imposed on society as a wholesociety as a whole

This is called a This is called a negative externalitynegative externality

We usually understand We usually understand these as decisions made these as decisions made

based on individual based on individual considerationsconsiderations

What does the What does the general want?general want?

What will the What will the soldier decide?soldier decide?

What might What might motivate him motivate him to do as the to do as the general wants?general wants?

Sometimes the benefits Sometimes the benefits aren’t as obvious as the aren’t as obvious as the

costs at first glancecosts at first glance What’s the What’s the

deal on the deal on the Red Coats?Red Coats?

British British officers were officers were more worried more worried about the about the soldiers soldiers running away running away than being than being shot.shot.

Now you tryNow you try

Now you tryNow you try You are being chased by bandits and your sword is broken.You are being chased by bandits and your sword is broken. Fortunately, you are on a horse and they are on foot.Fortunately, you are on a horse and they are on foot. Unfortunately your horse is tired and they will catch up Unfortunately your horse is tired and they will catch up

soon.soon. Fortunately, you have a bow and as a hero, you never miss.Fortunately, you have a bow and as a hero, you never miss. Unfortunately, you have only 10 arrows and there are 40 Unfortunately, you have only 10 arrows and there are 40

bandits.bandits. The bad guys are strung out in a line with the fastest guys in The bad guys are strung out in a line with the fastest guys in

front. They are close enough to count your arrows.front. They are close enough to count your arrows.

Use cost-benefit analysis to escape!!!Use cost-benefit analysis to escape!!!

We call the satisfaction of We call the satisfaction of your wants and needs your wants and needs

utilityutility

EconomistEconomists have s have created an created an imaginary imaginary unit of unit of satisfactiosatisfaction called n called the utilthe util

The Law of Diminishing The Law of Diminishing UtilityUtility

We know that as We know that as we get more units we get more units of anything, the of anything, the satisfaction we satisfaction we derive from each derive from each one (the number one (the number of utils) decreases.of utils) decreases.

Is there anything Is there anything for which utility for which utility doesn’t diminish?doesn’t diminish?

Which brings us to the 7-11 Which brings us to the 7-11 from Hellfrom Hell

Here you can get only two things: Here you can get only two things: Twinkies and Hostess Cupcakes.Twinkies and Hostess Cupcakes.