unit 1 scarcity & choice how do people make choices?

Unit 1 Scarcity & Choice

How do people make choices?

EQ

What is your economic literacy score?20 questions pre-test on economic

knowledge

Your dreams Your future

What will make you Needs and Wants… Source of Income… Intangibles that money can’t buy…

Create a visual using pictures, images, drawings, words

What is Economics?

Economics is the study of how individuals and societies use their scarce resources to satisfy their unlimited wants.

Scarce = limited Resources = things used to make

other things (goods & services)

Land

Labor

Capital

Entrepreneur

Organize Resources

L and

G o od o r S ev ice(O u tp u t)

L ab or C a p ita l

R e so u rces(In p u ts)

Consumers buys

things they need or want.

Producers make

money.

Basic Economic TermsEconomics The study of how individuals and societies

use their scarce resources to satisfy unlimited needs.

Scarcity Limited; time, money, resources, and space

Resources Factors of production; land, labor, capital“Things used to make other things”

Land Items found in nature

Labor Work done by people

Capital Tools, equipment, factory, building NOT $

Goods Tangible items of value; computer

Services Intangible items of value; fixing a car

Entrepreneur

Start a business; goal to make $

Producer Business who sells goods/services

Consumer People who buys goods/services

Is sea water scarce?

Is it fixed in supply?

Do we want more sea water than we have?

Sea water is not scarce

Are they scarce?

Sunshine in Thailand

A free sample of candies given at a shopping centre

Fresh air in a café with many smokers

Sand in the desert

Are they scarce?

Sunshine in Thailand

A free sample of candies given at a shopping centre

Fresh air in a café with many smokers

Sand in the desert

Competition

We compete for the use of limited resources

2 ways of competition Price competition Non price competition e.g. waiting,

examination, lucky draw, violence…

Making choices

Which restaurant will you go for lunch?

What would you like to study at university?

What will you buy with $100? CD or dress ?

Which girl (boy) will you marry?

What is economics?

It studies how we allocate the limited resources to satisfy unlimited wants

Opportunity cost

Opportunity cost is the highest-valued option forgone

Choice among options

Rank options according to a person’s preference order

Option 1 going to cinema Option 2 going to sing karaoke Option 3 sleeping at home

What is the cost of going to the cinema?

Going to sing karaoke (highest-valued option forgone)

We cannot choose option 2 and option 3 at the same time, we only forgo option 2 when we select option 1

Choosing a career / job

Option 1 being an actress ( $10 Mn. p.a.) Option 2 being a nurse ( $ 0.5 Mn. p.a.) Income forgone being an actress < income

forgone being a nurse Cost being an actress < cost being a nurse

Choose the job with the lowest opportunity cost

More elderly found in queues

Before festivals, wait for gifts (rice, mooncakes, red envelopes etc)

In public clinics

Income forgone by elderly < income forgone by working persons

Cost of waiting by elderly < cost of waiting by working persons

Full cost

Option 1 going to a 1 hour concert and pays $200 for a ticket

Option 2 working in Park’n as a salesman earning $30 per hour

Option 3 working as a tutor earning $100 per hour

Full cost of attending the concert = price of ticket + income forgone (highest-valued option forgone)

Full cost of attending the concert = $200 + $100 = $300

Complimentary tickets

Going to Hong Kong Disneyland Ticket : Free of charge Money spent on food, transport..=$200 Income forgone = $500

Full cost of going for Disneyland (HK) =$700

Is Time a cost?

Price of a mobile phone =$1 800 Search = one evening Income forgone while searching = $200 Opportunity cost of buying the mobile

phone is $2 000

Uses of a flat

Mrs Lo has the following options for her flat in Shatin :

Option 1 Owner occupied Option 2 Vacant Option 3 Lease with a rental income $50 000

per year

Suppose she chooses to live in her flat, what is her cost of living in that flat?

Social Cost

Building a new railway $100 million Creating pollution nearby (e.g. cutting

trees, noises) $5 million Social cost of building highway = private cost + external cost = $105 million

Miss Cheng could spend two hours at a concert orMiss Cheng could spend two hours at a concert ortutoring a student at $70 per hour. She could use the time tutoring a student at $70 per hour. She could use the time on painting instead and earn a total of $170. If the price of on painting instead and earn a total of $170. If the price of the concert ticket is $250, what is the opportunity cost of the concert ticket is $250, what is the opportunity cost of her choice of going to the concert?her choice of going to the concert?

A. $410A. $410 B. $420B. $420 C. $430C. $430 D $440D $440

No. of No. of couponscoupons

GiftsGifts

55

1515

2020

CupCup

BagBag

CameraCamera

Mary has accumulated 20 Coupons.Mary has accumulated 20 Coupons.What is the opportunity cost to her What is the opportunity cost to her if she uses them to exchange for one if she uses them to exchange for one camera?camera?

A.CupA.Cup B. BagB. Bag C. Cup and BagC. Cup and Bag D. Cup or BagD. Cup or Bag

Which of the following statementsabout scarcity is true?

A. Once a choice is made, the problem of scarcity is solved.

B. A good is scarce if not everyone has it.

C. Scarcity means unlimited human wants.

D. Both rich people and poor people face the problem

of scarcity.

Answer: D

Which of the following are opportunity costs of attending school?

(1) Poor examination results

(2) Income forgone

(3) School fees

(4) Expenditure on dinners

A. (1) and (4) only

B. (1) and (3) only

C. (2) and (3) only

D. (2) and (4) onlyAnswer: C. (2) and (3) only

Decision-making tool #1

Cost-benefit analysis This decision-making tool is best use when solving the

problem of scarcity when you need to compare positives and negatives of which action to take or wise choice to make.

Alternative: any possible course of action in a given situation.

Benefit: positive consequence of actionCost: negative consequence of actionTrade-off: giving up one thing to gain anotherWise Choice: decision which gives the greatest benefit,

least cost

Cost-Benefit Analysis

Alternative

Benefit Cost

Wise choice is…

Economists Handy Dandy Guide

Why is Elvis reported as being alive? Use your “handy dandy guide” to solve the mystery!!!

TNSTAAFL

Economics can be summed up in one word: TNSTAAFL

“There’s no such thing as a free lunch”

TNSTAAFLRelationship between choice & opportunity cost…

20 hours free time

Simplify to 2 options

Illustrate scarcity, trade-off, & opportunity cost

Production Possibility Curve

Production possibilities ~ different quantities of goods that an economy can produce with given resources, time and technology.

Economists use the Production Possibility Curve (PPC) to demonstrate scarcity, trade-off, & opportunity cost for a society.

Production Possibility Curve

Scarcity leads to maximum production

Trade-off to increase production of one; have to decrease production of another

Inefficiency can get more without giving anything up

What is the opportunity cost of moving from Point A to B?

Scarcity,Trade-off & PPC

Production Possibilities Curve (PPC) illustrates the maximum output combination of two goods; “on the line”

Points A & B desirable; “best”?

Point C is not possible

Point D is inefficientTo increase production of guns;

Must decrease production of butter.

PPF for a Farmer

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

FIGURE 1. PPF for a Farmer

Attainable region So

yb

ea

ns

Wheat

E

D

C

B

A Unattainable region

60 65 52 38 30 20 10 0

10

20

30

40

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

Negatively sloped ↑ Q wheat by moving resources out of soybean

production and into wheat production Slope = opportunity cost Bowed outward

↑ Opportunity cost of wheat as ↑ wheat production Why? Inputs tend to be specialized. E.g., some land may

be better suited for wheat vs. soybean production.

Features of the PPF

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.