Overview
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The relationship between economics and scarcity
Why scarcity necessitates choice
The importance of opportunity cost
Making decisions on the margin
In class activity
Defining Economics
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Economics: a social science that examines how
people choose among the alternatives available to
them.
Without scarcity, there would be no need for economics.
 Scarcity requires that we make choices among
alternatives.
 Economics helps us understand how society, individuals,
and companies make decisions about limited (scarce)
resources.
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Economic Approach to Decision Making
Because of scarcity, people must
 make choices
 consider opportunity cost
 pursue their self-interest
Scarcity Forces People to Make Choices
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Scarcity: a limited availability of something that does
not satisfy all wants. This limited availability requires
that choices be made among scarce alternatives.
A scarce good is something that when chosen, requires that
you give up other alternative choices/options. For example,
if you spend your money on a new phone, you give up
everything else that you could have purchased (like a
computer). With scarce goods, you can’t have your cake
and eat it too – you must make a choice.
 A free good is something that when chosen, does not require
that you give up other alternative choices/options. For
example, if you take a breath of fresh air, you didn’t have
to give anything else up.
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Scarcity
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Choice
The following choices have to be made
by society
 Tax policy, government programs, etc.
by individuals
 What to purchase? Where to live?
by companies
 What to produce? How to produce it?
Scarcity Makes Opportunity Cost Important
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Opportunity cost: the value of the best alternative that
is given up when making a choice.
For example, the opportunity cost of
 going to college is the money spent on tuition, fees,
books, and lost wages.
 owning your business are the wages you could have
earned being an employee for someone else
 spending your money is the income you could have
earned from investing it
Scarcity, Self-Interest, and Society
Adam Smith (1723-1780)
recognized that voluntary
transactions benefit both
buyers and sellers. Because
these transactions are being
driven by self interest, they
must maximize the well being
of those involved, and
therefore society.
Choices on the Margin
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Choices at the margin: choosing to do a little bit
more (or less) of something.
For example, each of the following would represent
marginal choices
Eating 12 potato chips instead of 10 chips (+2 chips)
 Sleeping for 7 hours instead of 8 hours (-1 hour)
 Spending $400 a month on restaurant meals instead of
$550 (-$150)
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Choices on the Margin
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If someone is allocating their resources (time and
money) in the best possible way, it should be
impossible for them to reduce one behavior and use
these newly available resources in a way that makes
themself better off.
For example, if you spend your dinner budget on two
hamburgers, you are wasting resources. Most people
would rather eat just one hamburger, and use their
remaining money to buy fries and a soda.
You Try It!
Scenario:
 You just graduated from college and started a new
job that pays $45,000 per year. The following
budget shows your current discretionary income
after paying 35% in payroll deductions (taxes,
social security, benefits, etc.).
 GOAL: Use the economic approach to decision
making to increase your savings to $10,000, for the
down payment on your first home.
You Try It!
Budget
Monthly Income (take home pay)
Original
$2,437.50
Less Monthly Expenses
Housing
$800
Food
$400
Student Loans
$250
Credit Cards
$200
Insurance, Charity, Emergency Fund
$300
Utilities, Internet, Cable, Water
$200
Clothes, Cell phone, Entertainment
$250
Total Monthly Expenses
Cash surplus/deficit per month
Years it takes you to safe $10,000
$2,400
$37.50
22.22
Improved