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Economics 14: Lecture 1: Scarcity and Choice

The document summarizes key concepts from an economics lecture on scarcity and choice. It defines economics as the study of production, exchange, and consumption of goods and services. It explains the concepts of scarcity due to limited resources and unlimited wants, opportunity costs as the next best alternative given up, and how rational decision making involves comparing marginal costs and benefits.

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0% found this document useful (0 votes)
27 views5 pages

Economics 14: Lecture 1: Scarcity and Choice

The document summarizes key concepts from an economics lecture on scarcity and choice. It defines economics as the study of production, exchange, and consumption of goods and services. It explains the concepts of scarcity due to limited resources and unlimited wants, opportunity costs as the next best alternative given up, and how rational decision making involves comparing marginal costs and benefits.

Uploaded by

Derby
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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10/25/21, 5:23 PM Lecture 1 Notes

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Economics 14

Lecture 1: Scarcity and Choice


definition of economics
scarcity

opportunity costs
marginal costs and
marginal benefits

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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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10/25/21, 5:23 PM Lecture 1 Notes

Scarcity
Economics is

the study of the allocation of scarce resources among competing and


insatiable needs so as to maximize welfare.

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:

1. land - raw materials and natural resources


2. labor - workers
3. capital - buildings, machinery, factories, equipment

Each of the resources exists in a finite, limited quantity.

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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10/25/21, 5:23 PM Lecture 1 Notes

transportation 4,800
opportunity costs 56,000
total costs $112,800

Instead of attending college you could be doing something else


such as working or
backpacking across Europe. That something has
a value to you; the value of whatever
you would have done if you
had not attended college is the opportunity cost of going to
college.

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 and Marginal Benefits


Most decisions are not of the all or nothing variety. Most
decisions involve choosing a
little more or a little less of
something. Rational decision making involves comparing the
costs
and benefits of that incremental change. Loosely put, the
additional costs of
undertaking some activity are called the marginal costs. The additional benefits of
engaging in that activity are called the marginal benefits. If the marginal benefits
are
greater than the marginal costs, do it; otherwise, do not.

Should you have come to class today? Let's compare the


marginal 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


total marginal benefits $2.75

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10/25/21, 5:23 PM Lecture 1 Notes

So, since the marginal costs of attending class today are


greater than the marginal
benefits, rational behavior dictates
that you should not have come to class today.

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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10/25/21, 5:23 PM Lecture 1 Notes

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