The Basic Economic Problem Chapter 1-2

The Basic Economic Problem Individuals and businesses have unlimited wants and needs, but the economic resources they have are limited. This mismatch of unlimited wants and needs and limited economic resources is the basic economic problem.

Scarcity Not having enough resources to satisfy every need

Choices Everyone makes decisions based on scarcity. Scarcity forces you to make choices or decisions among the alternatives. The Economic Decision-Making is the process of choosing which wants, among several options, will be satisfied.

Tradeoffs and Opportunity Costs Trade-off is when you give up something to have something else. Opportunity cost is the value of the next-best thing. Opportunity cost is the next best alternative, not all possibilities. Because people’s values differ, the opportunity cost of the same decision may differ from person to person.

Opportunity Cost You have $2 in your pocket. You are hungry and thirsty. Soda - $1.00 Pizza - $2.00 If you decide to buy a slice of pizza, what is the opportunity cost?

Scarcity Tradeoffs Opportunity Cost NecessitatesResults In

When your alarm clock went off or your mother called you this morning, what choice did you face? AlternativesGet up now Do not get up now – get up later Perceived benefitDon’t have to hurry Get to have breakfast Get to review for test Get to stop for coffee More sleep Stay warm Action taken (alternative chosen) X Opportunity cost (value of the alternative not chosen) Getting more sleep and staying warm

Production Example Betty’s Bakery has a limited capacity in which to bake its delicious desserts. Below is Betty’s production possibilities: PiesCakes

Consider the Following Questions Should a county produce everything it wants? Why or Why not? If Country A is better than Country B at producing everything, would Country A gain anything by trading with Country B? When a new home is built, why doesn’t one person do the carpentry, electrical, plumbing and landscaping?

Comparative Advantage – the ability to produce something at a lower opportunity cost than other producers Absolute Advantage – the ability to produce something using fewer resources than other producers Law of Comparative Advantage – An individual, firm, or country with the lowest opportunity cost of producing a good should specialize in that good.

Should LeBron James Mow His Lawn? LeBron can mow his lawn in two hours. He could also film a Nike commercial in two hours and make $10,000. His neighbor Scott can now LeBron’s lawn in 4 hours. He could also work at McDonald’s making $8/hour.

$10,000 $32 X (LeBron can do it in less time) X (Scott can do it at a lower opportunity cost) X (As long as LeBron pays Scott more than $32 they both benefit)

Decision Making Process 1.Define the problem 2.Identify the choices 3.Evaluate the advantages and disadvantages of each choice 4.Choose one 5.Act on your choice 6.Review your decision