Economics 14: Lecture 1: Scarcity and Choice
Economics 14: Lecture 1: Scarcity and Choice
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Economics 14
opportunity costs
marginal costs and
marginal benefits
Definition of Economics
Economists study the economy. In the economy, goods and services are produced,
exchanged, and consumed. So, economics is the study of the production, exchange, and
consumption of goods and services.
The subject matter of economics can be approached from two levels of analysis:
macroeconomics and microeconomics. Microeconomics looks at the production,
exchange, and consumption of goods and services at the level of an individual producer
of the good or the market in which a single good or service is exchanged or an individual
consumer of the product. The key word is individual; microeconomics deals with the
behavior of the individual entities that make up the economy.
Macroeconomics deals with the entire national economy. Rather than being concerned
with the production of a single good or service, say, vacuum cleaners, macroeconomics
looks at the total production of all goods and services including vacuum cleaners, coffee
makers, and frozen pizza. Rather than worrying about why the price of gasoline has risen
or fallen over the last several weeks macroeconomics is concerned with the inflation rate,
a measure of how the average price of all goods and services has changed.
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Scarcity
Economics is
Economists assume that people do not act randomly. Instead, people's behavior has a
purpose. We assume that people act in their own rational self-interest. People make the
choices they believe leave them best off.
Economics resources are used to produce goods and services. There are three categories
of economic resources:
We assume that people have unlimited wants. There is always something that people
want more of. Since we have a limited amount of resources, we can produce a limited
amount of goods and services. No matter how large that amount is, we cannot produce
enough to satisfy everyone's unlimited wants. This is known as scarcity and much of
economics looks at how people cope with scarcity.
Opportunity Costs
Because resources are scarce, people must make choices. A
choice is a comparison of
alternatives. For example, suppose I had a choice of having Kix, Cheerios, or Lucky
Charms for breakfast, and I decided to eat the Lucky Charms. When I chose to eat the
Lucky Charms I was simultaneously choosing not to eat Cheerios and not to eat Kix. I
gave up the chance to eat the Cheerios or the Kix. What I gave up has a value. This
value is called the opportunity cost.
Every choice has an opportunity cost. Opportunity cost is the value of the next best
alternative. Since I chose the Lucky Charms,
my opportunity cost is the Cheerios or the
Kix, whichever I most prefer.
For an accountant, the cost of an activity is the out-of-pocket expenses, all of the money
paid to undertake the activity. For an economist, the cost of an activity is everything
given up for it, including opportunity costs. For example, what are the total costs of a
college education?
tuition $44,000
books 3,200
beer costs 4,800
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transportation 4,800
opportunity costs 56,000
total costs $112,800
Let's say you would have found a job making sandwiches at Sheetz and
would have
made $14,000 a year. Then, your opportunity cost of
attending college would be the
wages you could have earned
instead.
marginal costs
gas, other car expenses $2.00
paper & ink used 0.25
opportunity costs (sleeping) 1.00
breakfast 2.00
total marginal costs $5.25
marginal benefits
knowledge $0.50
higher lifetime income due to better economics grade
earned because you learned about opportunity costs
0.25
in class today
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But, many of you did attend class today. There are two possible explanations. One,
you've all behaved irrationally. You came to class knowing that the marginal benefits
were smaller than the marginal costs. However, it is not a good idea to assume that so
many people have behaved irrationally. So, second, we have incorrectly measured the
costs and benefits.
marginal costs
gas, other car expenses $2.00
paper & ink used 0.25
opportunity costs (sleeping) 1.00
breakfast 2.00
total marginal costs $5.25
marginal benefits
knowledge $0.50
higher lifetime income due to better economics grade
earned because you learned about opportunity costs 0.25
in class today
were able to socialize with other students 2.00
spent 50 minutes with me 2.51
total marginal benefits $5.26
David A. Latzko
Business and Economics
Division
Pennsylvania State
University, York Campus
office: 13 Main
Classroom Building
phone: (717) 771-4115
fax: (717) 771-4062
e-mail: dlatzko at
psu.edu
web:
www.yk.psu.edu/~dxl31
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