Scarcity Choices Tradeoffs and Opportunity Cost

2. We cannot satisfy all of our wants. Choice 1. Resources are scarce 2. We cannot satisfy all of our wants. 3. We need to make choices.

What choices did you make today? What did you give up in making those choices? Why do we have to make these choices? Because our resources are scarce! Especially our financial resources as consumers! Because we have to make choices we are faced with opportunity costs.

Opportunity Cost Opportunity cost is the highest valued option foregone, or next best alternative. The tradeoff we are making when we decide to consume or produce. Why is it referred to as a cost?

A plot of land could have several possible uses: For example, A plot of land could have several possible uses: -develop shopping center -develop a baseball stadium -develop private housing estate What would you build? What would be your opp. cost?

Opportunity cost Suppose I have $100 and I have the following wants. I must make a choice. My preference is as follows: 1st choice: Concert ticket $100 2nd choice: A pair of jeans $100 3rd choice: A Leather Bag $100

Opportunity cost I will buy the tickets because I value them the most. 1st choice: concert ticket $100 2nd choice: Jeans $100 3rd choice: Bag $100 What will I buy? I will buy the tickets because I value them the most.

Opportunity cost He has forgone his options of buying his: 2nd choice: Jeans 3rd choice: Bag If I did not buy the concert tickets, I would buy the Jeans. So, the highest valued option forgone/ the opportunity cost is the Jeans.

Change in cost Choice Price 1. Concert ticket $100 2. Jeans (chosen) 3. Bag What is the opportunity cost if I choose Jeans?

Change in cost Choice Price 1. Concert ticket $100 2. Jeans 3. Bag (chosen) What is the opportunity cost if I choose the leather Bag?

Opportunity cost (full cost) The full cost of an action refers to the highest valued alternative use of money and the highest valued alternative use of time.

Opportunity cost (full cost) I buy the concert ticket, and my highest valued option forgone is still the pair of Jeans. However, I needs 2 hours to buy the ticket. Furthermore, suppose that if I do not buy the ticket, I can use the time to earn $200 as a tutor.

1. Concert ticket (chosen) Change in cost Choice Previous Situation 1. Concert ticket (chosen) $100 2. Jeans 3. Bag 2 hour income $200 What is the opportunity cost if I choose concert ticket?

1. Concert ticket (chosen) Change in cost Choice Previous Situation 1. Concert ticket (chosen) $100 2. Jeans 3. Bag 2 hour income $200

Opportunity cost (full cost) The full opportunity cost = Jeans $100 Income from tutoring $200 +

Goods Goods are anything that can satisfy human wants.

Goods Thinking: Are the following Goods? 1. Apple 2. Cigarette 3. Air 4. Chicken 5. Movie

Goods Economic Goods Free Goods

Economic Goods Economic goods are goods whose quantity is insufficient to satisfy all our wants, so that more is preferred to less. Any Good that is rationed by the use of a price. Any good that uses resources which could have been put to use producing something else. Can you give some examples of economic goods?

Free Goods Free goods are goods whose quantity is sufficient to satisfy all our wants, so that more of them are NOT preferred. A good that doesn’t involve opportunity costs in its production. The price of free good is zero because no one is willing to pay for it. What goods are free goods? Is the fruit the Japanese restaurant gives you at the end of the meal free goods?

Free Goods What is ice? A Free or Economic Good?

Tying it all back to Opportunity Cost Lets take this statement: If a good or service has an opportunity cost it must be scarce. True or False?

Write a short paragraph describing whether this air is a free or economic good? Explain your answer.

There is a saying: “There is no such thing as a free lunch.” By Milton Friedman How true is this statement?

Because we have scarcity & infinite wants we are forced to make choices. These choices lead us to 3 basic economic problems a society must decide upon. What should be produced and in what quantities?? How should things be produced??? Who should things be produced for?? How will they be distributed?? These questions also depend on the rationing system we live in. (ex. Free market, planned economy, etc.) We will come back to these later.