Scarcity

We experience scarcity because: Wants are unlimited. Wants are unlimited. Resources, however are limited. Resources, however are limited.

What resource is most scarce for you? Well, for me it’s time! Well, for me it’s time! How would life be different if you had 6 more hours every day? How would life be different if you had 6 more hours every day?

How do we cope with scarcity? We make choices We make choices

How do we choose? Economists assume that people make rational choices that they believe will benefit them. Economists assume that people make rational choices that they believe will benefit them. Is that actually true? Is that actually true?

Not always, we make many irrational choices.

But more often than not, people act in their own interest The Evolutionary argument: If they don’t, they don’t survive for long. The Evolutionary argument: If they don’t, they don’t survive for long. This was true for all living creatures. This was true for all living creatures. It’s also true for people running businesses or investing in the stock market. It’s also true for people running businesses or investing in the stock market. It’s also impossible to predict irrational behavior; people might do anything if they’re not acting in their best interest. It’s also impossible to predict irrational behavior; people might do anything if they’re not acting in their best interest.

Rational decision making involves weighing costs against benefits. Costs: Resources we expend to gain something. Costs: Resources we expend to gain something. Benefits: Satisfaction of our wants or needs. Benefits: Satisfaction of our wants or needs.

Even when it’s not easy to see how benefits outweigh costs, analysis usually reveal rationality How much should we be willing to spend for athletic shoes? How much should we be willing to spend for athletic shoes? What are the costs? What are the costs? The benefits? The benefits?

Should you spend more time deciding what candidate to vote for or what car to buy? What’s more important? What’s more important? How much impact do you have on the election? How much impact do you have on the election? On the decision about the car? On the decision about the car?

Sometimes we weigh benefits to ourselves against costs imposed on society as a whole This is called a negative externality This is called a negative externality

We usually understand these as decisions made based on individual considerations What does the general want? What does the general want? What will the soldier decide? What will the soldier decide? What might motivate him to do as the general wants? What might motivate him to do as the general wants?

Sometimes the benefits aren’t as obvious as the costs at first glance What’s the deal on the Red Coats? What’s the deal on the Red Coats? British officers were more worried about the soldiers running away than being shot. British officers were more worried about the soldiers running away than being shot.

Now you try

You are being chased by bandits and your sword is broken. You are being chased by bandits and your sword is broken. Fortunately, you are on a horse and they are on foot. Fortunately, you are on a horse and they are on foot. Unfortunately your horse is tired and they will catch up soon. Unfortunately your horse is tired and they will catch up soon. Fortunately, you have a bow and as a hero, you never miss. Fortunately, you have a bow and as a hero, you never miss. Unfortunately, you have only 10 arrows and there are 40 bandits. Unfortunately, you have only 10 arrows and there are 40 bandits. The bad guys are strung out in a line with the fastest guys in front. They are close enough to count your arrows. The bad guys are strung out in a line with the fastest guys in front. They are close enough to count your arrows. Use cost-benefit analysis to escape!!! Use cost-benefit analysis to escape!!!

We call the satisfaction of your wants and needs utility Economists have created an imaginary unit of satisfaction called the util Economists have created an imaginary unit of satisfaction called the util

The Law of Diminishing Utility We know that as we get more units of anything, the satisfaction we derive from each one (the number of utils) decreases. We know that as we get more units of anything, the satisfaction we derive from each one (the number of utils) decreases. Is there anything for which utility doesn’t diminish? Is there anything for which utility doesn’t diminish?

Which brings us to the 7-11 from Hell Here you can get only two things: Twinkies and Hostess Cupcakes. Here you can get only two things: Twinkies and Hostess Cupcakes.