Scarcity and Opportunity Cost Economics Mr. Hellums

Why can’t we have all we want? Because… Available resources are limited  Land (57,506,000 sq mi. & not even all habitable!)  Labor (7.2 bil. souls x 24 hrs a day)  Capital (less than ∞, trust me)  Entrepreneurship (not everybody is Jeff Bezos) Human desires are boundless What do we call this? SCARCITY!

But! Although we cannot have it all… …we still can have SOME of it. So: WWhat shall we have? HHow much of it? HHow shall we produce it? WWho will get it? Scarcity implies the need to make CHOICES!

Why do we have to make choices? I WANT IT ALL!! SCARCITY CHOICE Scarcity Forces You to CHOOSE

Individuals Choose When people make choices they receive benefits from the actions they take. When people make choices there are costs associated with the actions they take.

Economic Reasoning Principle:

Opportunity Cost The opportunity cost of a choice is the value of the next best alternative foregone

Economists Think in Terms of Opportunity Costs Do you want to play FIFA for an extra hour tonight before bed? Do you want to play FIFA all night until it’s time to go to school?

Economists Think in Terms of Opportunity Costs and not in Terms of Absolutes We need to stop pollution? – How costly would that be? – Does that mean we want zero pollution?

“It’s a Jungle Out There…” Zebra’s and Lions do it, too – How fast do they run? – Why do they wait? Life is difficult in the jungle – the opportunity cost of “poor” decisions is very high…

Marginal Analysis Decisions are made by comparing Marginal Benefit (MB) to Marginal Cost (MC) Example: You are out on a “Date” for dinner—just the two of you. It’s going reealllly slowww… – Compare the marginal benefit to marginal cost – MB > MC, then I eat slow – MB < MC, then I eat faster and “text” my friends

Marginal Analysis Do all costs matter to your decision? Sunk costs Waterworld After spending $80m a hurricane sinks set Producers ask for $50m more to finish the movie – Movie will only make $100m in theaters if finished – Would you give them the money?

Higher or Lower Opportunity Costs When do you change lanes? When do you speed? If you pass a traffic policeman, do you slow down? If you are taking a very sick friend to the ER, do you hurry?

What Determines Your Opportunity Cost? Tastes and preferences (your values) Known Alternatives Rules of the Game—Institutions NEXT SLIDE -- “THE QUESTION”

Pop the “Question” “Will You Marry Me?” What’s the best response? – What’s the opportunity cost of accepting? – What’s the opportunity cost of refusing? How does the “guy” increase the chance of getting a good outcome? – “Diamonds are Forever” Economic decisions are made at the “margin”

A Real Billboard

“Did He Really Say That?” An early “Prom” proposal What’s the best response? – What’s the opportunity cost of accepting? – What’s the opportunity cost of refusing? – How can you lower your opportunity cost? How does your view change as the Prom approaches? Economic decisions are made at the “margin”