Scarcity, Choice and Opportunity Cost CHAPTER EIGHT – MONEY MANAGEMENT NOTES

BASIC TRIOLOGY OF ECONOMICS (and Personal Finance ) Scarcity, choice and cost are sometimes referred to as the basic trilogy of economics because of the strong interrelationships between these fundamental concepts. Today’s lesson will explain these three very important concepts!

LIST OF POTENTIAL ACTIVITIES Decisions ... How many of you never seem to have enough time to do all of the things you want to do? Imagine for some reason you find yourselves with an hour of free time today that you did not expect to have. What might you do with this free time? LIST OF POTENTIAL ACTIVITIES Sleep Chat on the computer Go hang out with a friend Go shopping Do some homework Watch TV

Why can’t you do all of these things? Because time and resources are limited! SCARCITY is the condition of not being able to have ALL of the good and services one wants. Scarcity exists because there are never enough available resources to produce all the goods and services people want. EVERYONE experiences scarcity.

Decisions ... Why is the second choice placed under cost? Choice Cost Don’t study, hang with friends Lower Grade Study for test = higher grade Less sleep, less time with friends = Time = FUN Why is the second choice placed under cost?

Opportunity Cost The second choice is placed under cost because in choosing the first choice you lost the opportunity to do the second. This is what is known as opportunity cost – or the value of what was given up to pursue another option.

Opportunity Cost For example: Let’s say you decided to spend your extra free hour talking with friends. The opportunity cost could be that you didn’t spend that hour studying for a test. Instead of getting an “A” you got a “B”. Talking with your friend on the phone for an hour “cost” you a chance at the “A”. Different people make different choices and therefore have different opportunity costs.

TRADE OFFS A tradeoff involves giving up some of one thing to get more of another. Tradeoffs happen to you every day ... There are tradeoffs with every spending decision you make. For example: A tradeoff might be deciding to go to Vegas with your friends. In order to do it -- you decided to give up fast food and movies for a few months to save up the money.