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Unit 1 Scarcity & Choice
How do people make choices?
EQ
What is your economic literacy score?20 questions pre-test on economic
knowledge
Your dreams Your future
What will make you Needs and Wants… Source of Income… Intangibles that money can’t buy…
Create a visual using pictures, images, drawings, words
What is Economics?
Economics is the study of how individuals and societies use their scarce resources to satisfy their unlimited wants.
Scarce = limited Resources = things used to make
other things (goods & services)
Land
Labor
Capital
Entrepreneur
Organize Resources
L and
G o od o r S ev ice(O u tp u t)
L ab or C a p ita l
R e so u rces(In p u ts)
Consumers buys
things they need or want.
Producers make
money.
Basic Economic TermsEconomics The study of how individuals and societies
use their scarce resources to satisfy unlimited needs.
Scarcity Limited; time, money, resources, and space
Resources Factors of production; land, labor, capital“Things used to make other things”
Land Items found in nature
Labor Work done by people
Capital Tools, equipment, factory, building NOT $
Goods Tangible items of value; computer
Services Intangible items of value; fixing a car
Entrepreneur
Start a business; goal to make $
Producer Business who sells goods/services
Consumer People who buys goods/services
Is sea water scarce?
Is it fixed in supply?
Do we want more sea water than we have?
Sea water is not scarce
Are they scarce?
Sunshine in Thailand
A free sample of candies given at a shopping centre
Fresh air in a café with many smokers
Sand in the desert
Are they scarce?
Sunshine in Thailand
A free sample of candies given at a shopping centre
Fresh air in a café with many smokers
Sand in the desert
Competition
We compete for the use of limited resources
2 ways of competition Price competition Non price competition e.g. waiting,
examination, lucky draw, violence…
Making choices
Which restaurant will you go for lunch?
What would you like to study at university?
What will you buy with $100? CD or dress ?
Which girl (boy) will you marry?
What is economics?
It studies how we allocate the limited resources to satisfy unlimited wants
Opportunity cost
Opportunity cost is the highest-valued option forgone
Choice among options
Rank options according to a person’s preference order
Option 1 going to cinema Option 2 going to sing karaoke Option 3 sleeping at home
What is the cost of going to the cinema?
Going to sing karaoke (highest-valued option forgone)
We cannot choose option 2 and option 3 at the same time, we only forgo option 2 when we select option 1
Choosing a career / job
Option 1 being an actress ( $10 Mn. p.a.) Option 2 being a nurse ( $ 0.5 Mn. p.a.) Income forgone being an actress < income
forgone being a nurse Cost being an actress < cost being a nurse
Choose the job with the lowest opportunity cost
More elderly found in queues
Before festivals, wait for gifts (rice, mooncakes, red envelopes etc)
In public clinics
Income forgone by elderly < income forgone by working persons
Cost of waiting by elderly < cost of waiting by working persons
Full cost
Option 1 going to a 1 hour concert and pays $200 for a ticket
Option 2 working in Park’n as a salesman earning $30 per hour
Option 3 working as a tutor earning $100 per hour
Full cost of attending the concert = price of ticket + income forgone (highest-valued option forgone)
Full cost of attending the concert = $200 + $100 = $300
Complimentary tickets
Going to Hong Kong Disneyland Ticket : Free of charge Money spent on food, transport..=$200 Income forgone = $500
Full cost of going for Disneyland (HK) =$700
Is Time a cost?
Price of a mobile phone =$1 800 Search = one evening Income forgone while searching = $200 Opportunity cost of buying the mobile
phone is $2 000
Uses of a flat
Mrs Lo has the following options for her flat in Shatin :
Option 1 Owner occupied Option 2 Vacant Option 3 Lease with a rental income $50 000
per year
Suppose she chooses to live in her flat, what is her cost of living in that flat?
Social Cost
Building a new railway $100 million Creating pollution nearby (e.g. cutting
trees, noises) $5 million Social cost of building highway = private cost + external cost = $105 million
Miss Cheng could spend two hours at a concert orMiss Cheng could spend two hours at a concert ortutoring a student at $70 per hour. She could use the time tutoring a student at $70 per hour. She could use the time on painting instead and earn a total of $170. If the price of on painting instead and earn a total of $170. If the price of the concert ticket is $250, what is the opportunity cost of the concert ticket is $250, what is the opportunity cost of her choice of going to the concert?her choice of going to the concert?
A. $410A. $410 B. $420B. $420 C. $430C. $430 D $440D $440
No. of No. of couponscoupons
GiftsGifts
55
1515
2020
CupCup
BagBag
CameraCamera
Mary has accumulated 20 Coupons.Mary has accumulated 20 Coupons.What is the opportunity cost to her What is the opportunity cost to her if she uses them to exchange for one if she uses them to exchange for one camera?camera?
A.CupA.Cup B. BagB. Bag C. Cup and BagC. Cup and Bag D. Cup or BagD. Cup or Bag
Which of the following statementsabout scarcity is true?
A. Once a choice is made, the problem of scarcity is solved.
B. A good is scarce if not everyone has it.
C. Scarcity means unlimited human wants.
D. Both rich people and poor people face the problem
of scarcity.
Answer: D
Which of the following are opportunity costs of attending school?
(1) Poor examination results
(2) Income forgone
(3) School fees
(4) Expenditure on dinners
A. (1) and (4) only
B. (1) and (3) only
C. (2) and (3) only
D. (2) and (4) onlyAnswer: C. (2) and (3) only
Decision-making tool #1
Cost-benefit analysis This decision-making tool is best use when solving the
problem of scarcity when you need to compare positives and negatives of which action to take or wise choice to make.
Alternative: any possible course of action in a given situation.
Benefit: positive consequence of actionCost: negative consequence of actionTrade-off: giving up one thing to gain anotherWise Choice: decision which gives the greatest benefit,
least cost
Cost-Benefit Analysis
Alternative
Benefit Cost
Wise choice is…
Economists Handy Dandy Guide
Why is Elvis reported as being alive? Use your “handy dandy guide” to solve the mystery!!!
TNSTAAFL
Economics can be summed up in one word: TNSTAAFL
“There’s no such thing as a free lunch”
TNSTAAFLRelationship between choice & opportunity cost…
20 hours free time
Simplify to 2 options
Illustrate scarcity, trade-off, & opportunity cost
Production Possibility Curve
Production possibilities ~ different quantities of goods that an economy can produce with given resources, time and technology.
Economists use the Production Possibility Curve (PPC) to demonstrate scarcity, trade-off, & opportunity cost for a society.
Production Possibility Curve
Scarcity leads to maximum production
Trade-off to increase production of one; have to decrease production of another
Inefficiency can get more without giving anything up
What is the opportunity cost of moving from Point A to B?
Scarcity,Trade-off & PPC
Production Possibilities Curve (PPC) illustrates the maximum output combination of two goods; “on the line”
Points A & B desirable; “best”?
Point C is not possible
Point D is inefficientTo increase production of guns;
Must decrease production of butter.
PPF for a Farmer
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
FIGURE 1. PPF for a Farmer
Attainable region So
yb
ea
ns
Wheat
E
D
C
B
A Unattainable region
60 65 52 38 30 20 10 0
10
20
30
40
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
Negatively sloped ↑ Q wheat by moving resources out of soybean
production and into wheat production Slope = opportunity cost Bowed outward
↑ Opportunity cost of wheat as ↑ wheat production Why? Inputs tend to be specialized. E.g., some land may
be better suited for wheat vs. soybean production.
Features of the PPF
Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
