Scarcity, Choice, and Opportunity Cost
Chapter 1 Section 1
Mr. Henry
AP Economics
What is Economics?
Economics is the social science concerned with how
individuals, institutions, and society make optimal
choices under conditions of scarcity.
Scarcity: Fundamental economic problem of meeting
people’s virtually unlimited wants w/ scarce resources
This restricts our options and demands choices!
What are examples in your life when you had to make a
choice because of scarcity??
What is the difference between a Microeconomics
and Macroeconomics?
Microeconomics – economics concerned with individual units such as a person, a
household, a firm, or an industry
For example, we examine the sand, rock, and shells, not the beach
Macroeconomics – examines the economy as a whole or its basic aggregates, such
as the government, household, and business sectors. An aggregate is a collection,
so all of us as consumers would be lumped together as one huge unit called
“consumers.”
For example, macro looks at the beach, not the pieces such as the sand, rock, and
shells
TINSTAAFL?
There is no such thing as a free
lunch!
The history of TINSTAAFL…
Examples?
Free Cell phone w/ activation
Free Health Care
Buy one get one free
Friendship (have to invest time
& love)
Opportunity Costs & Utility
Because there is no such thing as a free lunch, the amount
of other products that must be forgone or sacrificed to
produce a unit of a product is known as the opportunity
cost.
What you give up You have to give up 10 apples to get 4 oranges 10
5
----------------------- - - = - - - = 2.5
What you gained
4
2
So for 1 orange you have to give up 2.5 apples!
Individuals look for opportunities to increase their utility, or
satisfaction, obtained from consuming a good or service.
Think about opportunity cost (the cost of the next-best
alternative use of money, time, or resources when
making a choice) during your lifetime. Cite an example
of something that you purchased or participated in but
also cite the opportunity cost…the choice that you gave
up.
Marginal Analysis: Benefits and Costs
When we make a choice or decision, we make a change
in the status quo.
Marginal Analysis compares marginal benefits and
marginal costs, meaning “extra” or “additional”
Example – ½ carat diamond vs. 1 carat diamond
Positive & Normative Economics
Positive Economics focuses on facts & cause-and-effect
relationships (uses scientific statements) aka “what is”
Normative Economics incorporates value judgments about what
the economy should be like aka “what ought to be” – the words
ought or should are indictors
Most economic controversy thus reflects differing opinions or
value judgments about what society should be like.
Test Preparation:
1) At the birthday party of your best friend, you see Mr.
Ceh help himself to a second piece of cake. For this
individual, it must be the case that
A. The marginal benefit of the second piece of cake is less than the
marginal cost
B. The total benefit received from eating cake is falling
C. The ratio of marginal benefit over marginal cost is less than one
D. The marginal benefit of the second piece of cake is greater than
the marginal cost
E. Mr. Ceh is irrationally consuming too much cake
D - The marginal benefit of the second piece of cake is greater than
the marginal cost
2) Zach has the choice to spend one hour studying for an
exam, mowing the lawn for one hour at a wage of $6, or
babysitting his nephew for one hour at a wage of $8. If we
know that Zach has chosen to study for the exam, which of
the following is true?
A. The benefit received from studying is greater than the
opportunity cost of $8
B. The opportunity cost of studying is $14, which is less than the
benefit received from studying
C. Zach is indifferent between studying and mowing the lawn
D. Zach’s behavior is irrational since babysitting was clearly superior
to all other options
E. Zach is indifferent between babysitting and mowing the lawn
A - The benefit received from studying is greater than the
opportunity cost of $8
3) Which of the following would best complete a short
definition of economics? “Economics is the study of…”
A.
B.
C.
D.
E.
How unlimited resources are allocated between scarce wants
How money is circulated through the economy
How corporations maximize the share price of their stock
How nations trade goods and services in a global marketplace
How scarce resources are allocated to satisfy unlimited wants
E - How scarce resources are allocated to satisfy unlimited wants
4) Although sleeping in on a work day or school day
has an opportunity cost for Mr. Henry, sleeping late
on the weekend does not.
A True
B False
• B False – there would be opportunity cost – ie my
son would not get his breakfast!
5) At fast-food restaurants:
A. consumers enjoy complete and accurate
information.
B. decisions are usually made by trial and error.
C. decisions entail comparisons of marginal costs and
marginal benefits.
D. benefits always exceed costs.
C decisions entail comparisons of marginal costs and
marginal benefits.