ECONOMIC PRINCIPLE #1… PEOPLE FACE TRADEOFFS Scarcity exists and it doesn’t go away. Because resources are limited, people must make choices.

Scarcity Isn’t Optional Fact: Resources ARE limited Land (natural resources) Labor (human effort) Capital (buildings, machines, & technology) Entrepreneurship (willingness to risk) Time Fact: Human desires are boundless

Why CAN’T we have all we want? Available resources are limited Land (57,506,000 sq mi. & not even all habitable!) Labor (6.7 billion souls x 24 hrs a day) Capital (less than ∞, trust me) Entrepreneurship (not everybody is Bill Gates) Human desires are boundless : 6.7 billion & increasing We can never quite have it all, there is always a desire lurking in the back of our mind. We WILL be hungry again tomorrow, we will be thirsty this afternoon. We will salivate over that next chocolate bar even if we had eaten a thousand of them to this day. It is our unfortunate predicament that the available resources will never quite match our desires and needs. What do we call this? Scarcity.

Scarcity Choice Although we cannot have it ALL… …we still can have SOME . So: What shall we have? How much of it? How shall we produce it? Who will get it? Mention at the end: some choices are wiser than others, i.e. some deal better with that problem of scarcity. That is a segueinto talking about growth as the most efficient way to fight scarcity and poverty because if the institutions are chosen wisely, then there will be growth. If the institutions are not chosen wisely, then there will be blood. Literally.

SCARCITY CHOICE How Do You Know When Something Is Scarce? Scarcity Forces You to CHOOSE SCARCITY CHOICE

ECONOMIC PRINCIPLE # 2… PEOPLE ECONOMIZE People choose the alternatives that they perceive to offer the greatest excess of benefits over costs.

Scarcity IS: Even in the face of abundance . . . What’s scarce when you’re in the Mall of America? at the all-you-can-eat buffet?

IT’S TIME FOR… Who gets the Happy Meal? Stop presentation to play scarcity activity

ECONOMIC PRINCIPLE # 3… ALL CHOICES INVOLVE COSTS The opportunity cost of a choice is the foregone alternative, the (benefits of the) alternative that was given up.

Opportunity Cost Analysis What was the 1st decision you made this morning?

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Get Up Now Don’t Get Up Now Perceived Benefits Choice Opp. Cost Benefits Refused

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Get Up Now Don’t Get Up Now Perceived Benefits Shower bkfst don’t rush On time coffee Choice Opp. Cost Benefits Refused More sleep

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Get Up Now Don’t Get Up Now Perceived Benefits Shower bkfst don’t rush On time coffee Choice X Opp. Cost Benefits Refused More sleep X

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Get Up Now Don’t Get Up Now Perceived Benefits Shower bkfst Coffee don’t rush On time Choice X Opp. Cost Benefits Refused More sleep

Characteristics of Cost Costs are the results of ACTIONS Costs are TO people; things have no cost All costs lie in the FUTURE Costs are frequently not monetary (although we may value them in dollar terms)

Opportunity Cost =the Next-Best Alternative Identifying Opportunity Cost: What are the considered alternatives? Prioritize the alternatives – What is the best and what is the “next-best”? What would you do – not what could you do? What does the decision-maker perceive to be the benefits of each alternative?

Because people’s values differ, the opportunity cost of the same decision may differ from person to person.

People’s Choices are always RATIONAL Rational choice = choosing the alternative that has the greatest excess of benefits over costs.

If ALL choices are rational, then the challenge is to understand the decision-maker’s perception of costs and benefits.

Things to remember: Opportunity cost isn’t EVERYTHING you give up, just the most valued (or “next best”) thing. Opportunity cost helps explain all human behavior, not just behavior in businesses or markets.