AOF
Business Economics
Unit 2, Lesson 3
Scarcity and Choices
Copyright © 2008–2012 National Academy Foundation. All rights reserved.
The concept of scarcity says that nothing is free
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Free
Lunch
Are the best things in life free?
Scarcity means you can never have enough of something
• TradeoffsWhat
you give up by
choosing one
alternative over
another
• Opportunity
CostThe value of
the next-best
alternative
• UtilityThe benefit
or satisfaction gained
from the use of a
good or a service
We make choices by weighing benefits against costs
• Cost-Benefit Analysis: The practice of weighing the benefits or
gains against the opportunity costs incurred from a particular
choice in order to make the best decision.
• Evaluate the benefit of each likely option (understand each
options utility)
• Look at the Constraints (time, resources, technology) and
tradeoffs for each option.
• Choose the option that gives the biggest benefit while not
exceeding their resources.
• Most economic decisions are not all-or-nothing situations; rather
they tend to work across a number of options with different
benefits and opportunity costs.
• The main idea is that every choice presents different options an
that we make our decisions by weighing the different benefits and
opportunity costs of each options.
iTunes vs. Lunch
 Objective: Get the most utility from your $3
 Constraint: You only have $3
Consciously or unconsciously, we are always performing
cost-benefit analyses when making decisions
• Building your own cost-benefit analysis
 Example of financing a new car vs. buying a
used car
Vocabulary
constraints
The resource limitations that
scarcity places on production.
economic
efficiency
The production of the desired result
with the minimum amount of effort,
expense, or waste while accounting
for the costs and benefits
associated with the decision.
opportunity cost
The value of the next-best
alternative, which was given up
when the preferred alternative was
chosen.
Vocabulary
production possibility
frontier
A graph that shows the different
amounts of two goods that an
individual or a group can efficiently
produce in a certain interval of time
with limited productive resources
when producing with optimal
technical efficiency.
scarcity
The situation that exists when there
are not enough resources to meet
human wants and needs.
tradeoffs
The alternative given up when making
a choice.
utility
The benefit or satisfaction gained
from the use of a good or a service.