Scarcity

Lesson Objectives Display understanding of why scarcity of resources is the basic economic problem Display understanding that the existence of scarcity forces economic actors to make choices Demonstrate the ability to assess the costs and benefits of alternatives when making decisions, taking into account opportunity costs and tradeoffs Create graphs showing production possibilities and associated tradeoffs

Key Vocabulary Terms Constraints Economic Efficiency Opportunity cost Production Possibility Frontier Scarcity Tradeoffs Utility

Scarcity, Choice and Tradeoffs Download: : Opportunity Costs and Tradeoffs in Real Life Is anyone willing to trade one of these resources for the other? Is one resource worth more than the other? Why? Is anyone willing to trade one of these resources for another resource?

Unit 2, Lesson 3 Scarcity and Choices AOF Business Economics Unit 2, Lesson 3 Scarcity and Choices Copyright © 2008–2011 National Academy Foundation. All rights reserved. Copyright © 2008–2011 National Academy Foundation. All rights reserved.

The concept of scarcity says that nothing is free Lunch Are the best things in life free? Copyright © 2008–2011 National Academy Foundation. All rights reserved.

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 Copyright © 2008–2011 National Academy Foundation. All rights reserved.

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. Objective: Get the most utility from your $3 Constraint: You only have $3 Copyright © 2008–2011 National Academy Foundation. All rights reserved.

Example of financing a new car vs. buying a used car 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 Copyright © 2008–2011 National Academy Foundation. All rights reserved.

Opportunity Costs and Tradeoffs The value of the second-most desirable option is known as the opportunity cost Complete Opportunity costs and tradeoffs in real life worksheet and turn in

When is a penny not worth a penny? What is efficiency? Economists use the concept of efficiency to describe how individuals, businesses, and governments determine how to best use scarce resources to achieve their goals

When is a penny not worth a penny? Technical Efficiency: Using the smallest input of resources to obtain a stated level of output (getting the most out of something) Economic Efficiency: Producing the desired result with the minimum amount of effort, expense, or waste while accounting for the costs and benefits associated with the decision

When is a penny not worth a penny? Because of the rising cost of copper and zinc, both scarce resources, the actual cost of producing a penny is estimated to be more than 1.5¢ A nickel now costs 5.73¢ to make Despite its inefficient use of scarce resources, it may have some greater benefit to its user (economists often call this utility) than what it costs to produce it.

When is a penny not worth a penny? How many would pick a penny up off the ground if they saw one (how many picked up one of the pennies on the classroom floor)? How often do you use pennies in transactions? How many have a piggy bank/change jar in their household?

Should we keep the penny? I will divide the class in half One group will be pro-penny One group will be anti-penny Download- Reading: Is It Time to Get Rid of the Penny? Use this to gather information regarding your debate

Should we keep the penny? I will give each side 5 minutes to prepare a speaker to talk for 2 minutes about their side of the argument The opposing team should take notes for the rebuttals (one minute)

Should we keep the penny? Did their personal opinions change during the debate? If so, how? If their opinions stayed the same, were they strengthened by any of the arguments presented? Were any arguments left out of the debate that could have made one side more persuasive?

Should we keep the penny? Economic efficiency is about utility, not just production While efficiency and utility are related, the quantity of utility you gain is still constrained by scarcity Efficiently production and distribution is done (in terms of both technical efficiency or economic efficiency), you still can’t get everything you want

Allocating Scarce Resources Need to decides who works and for how long Act as survivors to make key economic decisions Creating an economic model All start with a set of assumptions

Assumptions It takes 30 person-hours to build an adequate shelter. It takes 25 person-hours to gather enough food for the whole tribe and bring it back to camp. There are five people who can work. They have 10 hours before it gets dark.

Strategy Will the survivors be able to both build a shelter and find enough food in the 10 hours of daylight remaining? What is the best way to allocate people to each of the two tasks? Will the group have any free time left?

Determine allocation How did you decide to allocate workers to complete the tasks?

Creating a Production Possibility Frontier Graph Summarizes data into a graph to understand your model better

Production Possibility Just like the survivors, businesses must often choose more of one option than another, each with high utility. So when Toyota Motor Co. opts to produce 1,000 more Priuses instead of 900 more Highlanders, the choice could mean that both cars are valuable but that Priuses have greater utility.

Enrichment For further exploration of production possibility tables and production possibility frontier graphs, visit www.netmba.com/econ/micro/production/possibility. It explores these concepts using the case of an island economy that produces only two goods: wine and grain.

Production Possibility Frontier Download: Worksheet- Production Possibility Frontier

Cost-Benefit Analysis Imagine that zoning laws and low property costs have led to the establishment of a number of auto body shops near your home. While the shops have been an important source of jobs for locals, including your mother and your best friend’s father, they come with a number of unwelcome byproducts: noise, parking hassles, and increased traffic. The last issue has become a major point of contention within the community as street racer cars have hit six kids in the last two years; one of the kids was your cousin.

Cost-Benefit Analysis A number of your neighbors support a community redevelopment plan currently under consideration that would rapidly force out the body shops, while promising more environmentally friendly industries to replace them. The plan looks good on paper. However, the new jobs would likely require skills that few in the community possess. The city mayor has asked you to prepare a cost-benefit analysis of the plan considering the three following options:

Cost-Benefit Analysis Enact the plan in its current form Modify the plan so that the changes occur more slowly and include some money for career training for displaced local workers Reject the plan as too disruptive to the local community Download: Case study-Cost Benefit Analysis

Assignment Make two columns on a lined sheet of paper and list 5–10 needs and wants that you have, prioritizing them top down from highest to lowest. Read and consider the information from the Family Care Foundation’s “If the World Were a Village of 100 People,” found at http://www.familycare.org/news/if_the_world.htm. After reading, create an identical sheet of 5–10 needs and wants that the majority of “villagers” described in the text might have. Write a paper comparing and contrasting your list with the one they composed on behalf of the villagers

Quiz Scarcity Cost-benefit analysis Opportunity cost Benefits and utility Constraints Tradeoffs Technical and Economic Efficiency Short answer questions