ECONOMICS
What does it mean to me?
Part II:
•Scarcity
•Opportunity cost
•Supply & demand
The essential
question in
Economics is:
Scarcity
Scarcity:
Insufficient supply of something
where “insufficient” is interpreted
relative to the desires of a group
of people.
For instance, antiques are valued
for their scarcity….
1.) Everything we want
is not freely available
from nature. We have
unlimited wants and
limited resources.
2.) Everyone must give up
something to get more of
other things, called tradeoffs.
3.) It takes
resources to get
“things.” Those
resources could
be used to make
“other things.”
4.) In market settings,
goods have positive prices.
y
Economists
generally
use
quadrant 1
to graph
their
equations.
Quadrant II
Quadrant I
x
Quadrant III
Quadrant IV
5.) For public
policies as well as
private decisions,
there can be NO
benefits without
costs.
Some economists argue that we
are worse off because of the
FDA (Food and Drug
Administration).
What are the “costs” of having a
government administrative
agency control the food and
drugs a society can consume?
What are the advantages of
government imposed speed limits
on public highways?
What are the “costs” to you
of having your speed
limited?
Scarcity is NOT:
•
the same as poverty. (eg. Goods can be
scarce in United States AND Somalia. However,
scarcity isn’t going away; poverty might.)
• the same as shortage. (eg. Whether you
have a shortage or not depends upon how you
handle the rationing problem made necessary by
scarcity)
If I have 5 CDs to give away, how
should we decide to ration them?
•Wait in line
•Share equally
•Contest
•Survival of
the fittest
•Force
•Lottery
•Auction
•Arbitrary
decision
•Age
•Random
selection
•Strongest
•Vote
•Government
decree
•Blackmail
•Barter
•Scavenger
Hunt
In a market
economy,
PRICE is the
mechanism
used to ration
goods.
So……you’ve made a
decision--what incentives
affected it?
What if those incentives
changed?
When P = cost of
doing A
(When the PRICE goes UP, the cost of
doing ANYTHING goes UP)
$30
P
R
I
C
E
$20
$10
100
200
QUANTITY
300
Never say “need” or “can’t afford.
Everyone can afford anything...they
just make choices…..
NEED: At the price I
face and the amount I
can afford, I want it…..
This “choice” must be
among alternatives. If
there is no alternative or if
you “can’t choose” for
some reason, then it is not
an economic problem.
Scarcity
implies that
CHOICES
must be made.
•Sleep
•Food
•Drink
•Education
•Intimacy
•Sports
•TV
•Music
It is marginal benefits
and costs that matter.
Marginal
benefits
fall with
quantity.
P
R
I
C
E
QUANTITY
Opportunity Cost:
The next best
alternative given up
to get something.
Things have
prices...
Decisions
have
costs…..
ALL ACTIVITIES HAVE COSTS
BECAUSE OF SCARCITY
(School, date, consumer decisions, producer
decisions, etc.)
Marginal costs rise with quantity--since
marginal benefits fall with quantity, we
stop doing things at some “best” amount.
How this looks on a graph:
MC (marginal cost)
SUPPLY
P
R
I
EQUALIBRIUM
C
E
DEMAND
MB (marginal benefit)
A too little A*
A too high(Food, sleep, date,
study, etc.)
QUANTITY
FULL costs matter
(not a portion or just
money).
In the 1970s,
President Jimmy
Carter said that
the bicycle was
the most efficient
means of
transportation.
What did he
mean?
Costs are
subjective…..like benefits.
This means that costs and benefits are
particular to a given person…..they
exist only in each individuals’ mind.
Jodi Foster
went to Yale
University at a
time when she
had a big
movie career.
What were her
costs?
benefits?
Costs must be in the
future, since they come
from current decisions.
“Sunk” costs and “historical” costs
don’t matter…..they are irrelevant to
current decisions.
For example: Those who died in Vietnam
are “sunk” costs.
Let’s look at the graph again:
S (supply)
MC (marginal cost)
P
R
I
E (equalibrium)
C
E
D (demand)
MB (marginal benefit)
A too little A*
A too high(Food, sleep, date,
study, etc.)
QUANTITY
This graph also illustrates
two economic laws:
LAW of SUPPLY
LAW of DEMAND
LAW of SUPPLY states that producers are
willing and able to produce more of a good as its
price rises.
S (supply)
$80
P
R
I
C
E
MC (marginal cost)
$70
$60
$50
$40
$30
$20
$10
0
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
LAW of DEMAND states that consumers
are willing and able to consume less of a good as its
price rises.
$80
P
R
I
C
E
$70
$60
$50
$40
$30
MB (marginal benefit)
$20
D (demand)
$10
0
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
Putting these two curves together gives us
the point of EQUALIBRIUM
S (supply)
$80
P
R
I
C
E
$70
$60
$50
E (equalibrium)
$40
$30
$20
D (demand)
$10
0
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
In a market economy, the price
of a good signals to consumers
the cost of producing a good.
MARKET PRICE also signals to
producers the value that
consumers place on a good.
Market price coordinates the
actions of consumers (demand)
and producers (supply).
What happens
when changes
occur in the
economy?
How do these
changes affect
supply and
demand?
This month the government
expects 100,000 immigrants
to enter the U.S.
Does this example affect the supply
curve or the demand curve?
Chart I: Demand increase (P ; Q )
This month the government expects 100,000 immigrants to enter
the U.S.
E1
S
P P1
R
P0
I
E0
C
E
D1
D0
Q0 Q1
QUANTITY
Gas prices
increase
dramatically.
What happens
to the market
for big
automobiles?
Does this example affect the supply
curve or the demand curve?
Chart II: Demand decrease (P ; Q )
Gas prices increase dramatically. What happens to the market for
big automobiles?
S
P
R
P0
I
P1
C
E
E0
E1
D1
Q1 Q0
QUANTITY
D0
Plentiful oil fields are
discovered in Nevada.
What happens to the
market for oil?
Does this example affect the supply
curve or the demand curve?
Chart III: Supply Increase (P ; Q )
Plentiful oil fields are discovered in Nevada. What happens to
the market for oil?
S0
P
R
P0
I
P1
C
E
E0
E1
D
Q0 Q1
QUANTITY
S1
A drought has depleted
the corn crop. What
happens to the market
for corn?
Does this example affect the supply
curve or the demand curve?
Chart IV: Supply Decrease (P ; Q )
A drought has depleted the corn crop. What happens to the
market for corn?
S1 S0
P
P1
R
P0
I
E1
E0
C
E
D
Q1 Q0
QUANTITY
The End
Compiled by Virginia H. Meachum
Coral Springs High School