Scarcity, Choice, and Opportunity CostChapter 1 Section 1

Mr. HenryAP Economics

Economics is the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.

What is Economics?

Scarcity: Fundamental economic problem of meeting people’s virtually unlimited wants w/ scarce resources

This restricts our options and demands choices!What are examples in your life when you had to make a choice because of scarcity??

Microeconomics – economics concerned with individual units such as a person, a household, a firm, or an industryFor example, we examine the sand, rock, and shells, not the beach

Macroeconomics – examines the economy as a whole or its basic aggregates, such as the government, household, and business sectors. An aggregate is a collection, so all of us as consumers would be lumped together as one huge unit called “consumers.”For example, macro looks at the beach, not the pieces such as the sand, rock, and shells

What is the difference between a Microeconomics and Macroeconomics?

TINSTAAFL?

There is no such thing as a free lunch!

The history of TINSTAAFL…

Examples?

Free Cell phone w/ activation

Free Health Care

Buy one get one free

Friendship (have to invest time & love)

Opportunity Costs & UtilityBecause there is no such thing as a free lunch, the amount of other products that must be forgone or sacrificed to produce a unit of a product is known as the opportunity cost.

What you give up You have to give up 10 apples to get 4 oranges 10 5 ----------------------- - - - = - - - = 2.5

What you gained 4 2So for 1 orange you have to give up 2.5 apples!

Individuals look for opportunities to increase their utility, or satisfaction, obtained from consuming a good or service.

OC =

Think about opportunity cost (the cost of the next-best alternative use of money, time, or resources when making a choice) during your lifetime. Cite an example of something that you purchased or participated in but also cite the opportunity cost…the choice that you gave up.

Marginal Analysis: Benefits and Costs

When we make a choice or decision, we make a change in the status quo.

Marginal Analysis compares marginal benefits and marginal costs, meaning “extra” or “additional”Example – ½ carat diamond vs. 1 carat diamond

Positive & Normative EconomicsPositive Economics focuses on facts & cause-and-effect relationships (uses scientific statements) aka “what is”

Normative Economics incorporates value judgments about what the economy should be like aka “what ought to be” – the words ought or should are indictors

Most economic controversy thus reflects differing opinions or value judgments about what society should be like.

Test Preparation:1) At the birthday party of your best friend, you see Mr.

Ceh help himself to a second piece of cake. For this individual, it must be the case that

A. The marginal benefit of the second piece of cake is less than the marginal cost

B. The total benefit received from eating cake is fallingC. The ratio of marginal benefit over marginal cost is less than oneD. The marginal benefit of the second piece of cake is greater than

the marginal costE. Mr. Ceh is irrationally consuming too much cake

D - The marginal benefit of the second piece of cake is greater than the marginal cost

2) Zach has the choice to spend one hour studying for an exam, mowing the lawn for one hour at a wage of $6, or babysitting his nephew for one hour at a wage of $8. If we know that Zach has chosen to study for the exam, which of the following is true?A. The benefit received from studying is greater than the opportunity

cost of $8B. The opportunity cost of studying is $14, which is less than the

benefit received from studyingC. Zach is indifferent between studying and mowing the lawnD. Zach’s behavior is irrational since babysitting was clearly superior to

all other optionsE. Zach is indifferent between babysitting and mowing the lawn

A - The benefit received from studying is greater than the opportunity cost of $8

3) Which of the following would best complete a short definition of economics? “Economics is the study of…”A. How unlimited resources are allocated between scarce wantsB. How money is circulated through the economyC. How corporations maximize the share price of their stockD. How nations trade goods and services in a global marketplaceE. How scarce resources are allocated to satisfy unlimited wants

E - How scarce resources are allocated to satisfy unlimited wants

4) Although sleeping in on a work day or school day has an opportunity cost for Mr. Henry, sleeping late on the weekend does not. A True B False• B False – there would be opportunity cost – ie my

son would not get his breakfast!

5) At fast-food restaurants: A. consumers enjoy complete and accurate information.B. decisions are usually made by trial and error.C. decisions entail comparisons of marginal costs and marginal benefits.D. benefits always exceed costs.

C decisions entail comparisons of marginal costs and marginal benefits.

Essay Practice