Econ 201
Lecture 1.01
Essential Concepts
and Terms
Basic Economics Vocabulary
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Scarcity
Opportunity Cost
Tradeoffs
Benefit/Cost Analysis
Economics and Scarcity
• Lionel Robbins (1932):
• "the science which studies human behaviour as
a relationship between ends and scarce means
which have alternative uses."
• Scarcity means that available resources are
insufficient to satisfy all wants and needs.
• Absent scarcity and alternative uses of available
resources, there is no economic problem. The
subject thus defined involves the study of
choices as they are affected by incentives and
resources.
Scarcity
• There are not enough resources to
produce and consume all of the goods and
services we desire
Scarcity
• Limits on resources implies that decisions
must be made about:
– What to produce
– How to produce it
– Whom to produce it for
• Could be done by:
– Government direction (centrally planned
economy)
– Market forces (price signals)
Opportunity Costs
• Scarcity implies that choices must be made
– Choice implies that there is a trade-off or “opportunity cost”
(foregone alternative)
• Opportunity cost is defined as:
– The value of a good, service or resource in its next highest
valued use – consequence of scarcity
• Every decision has an opportunity cost
– Alaska: potential value of gold mining could disrupt Copper
River Salmon run
– Choice of academic majors
– How to spend time or money
Opportunity Costs
• Opportunity costs are not only
“observable” economic costs, but also
“unobservable” (or non-monetary) costs
– Opportunity costs of time
• Commute example
– Car
– Bus
– Bike
Commute Example
• Monetary costs associated with each alternative
– Car
• Initial purchase expense (fixed), O&M (variable: fuel,
maintenance, depreciation, licenses, insurance, parking),
time of commute
– Bus
• Time + fee
– Bike
• Initial purchase (bike and lock), O&M (tires, tune-ups,
clothing), time of commute
Monetary Costs Are Only Part of
the Picture
• Non-pecuniary benefits/costs
– Non-pecuniary: not directly measurable by $
• Car
– Benefit: flexibility to come/go
– Costs: traffic jams, road rage, finding a
parking space
• Bus
– Benefits: reading time, “no hassle”
Monetary Costs Are Only Part of
the Picture
• Bus
– Costs: no flexibility on time
• Bike
– Benefits: flexibility, improved health
– Costs: bad weather, lighting
Choose the alternative that has the
greatest net benefits
Basic principle of economic choice
• Individuals [or firms] choose their actions on the
basis of expected additional [net] benefits and
cost to themselves
– In this case -> alternative chosen will be the one that
yields the largest net benefits
– Paul’s “economizing process”
• Modest changes in monetary costs and benefits
can induce people to alter their behavior
– Cold, wet weather increases the costs of bike
commuting (or parking on the street)
Cost/Benefit Analysis
• Proper framework for analyzing economic
decisions is to compare the costs and
benefits of the alternatives
– Cost and benefits include not only directly
observable/measurable economic costs and
benefits, but also
– Opportunity costs (e.g., time),
– Non-pecuniary benefits
Key Terms
• Common understanding of key terms
– Use them as shorthand for the concept; but have a
precise/exact meaning
• Scarcity
– There are not enough resources to produce and
consume all of the goods and services we desire
• Opportunity costs
– What must be given up (next best alternative use) as
a result of a decision or choice
– “No such thing as a free lunch” (Milton Friedman)
• Cost-benefit analysis
– Every decision/action has tradeoffs