Section 1: Scarcity and the Factors of
governments, firms and
nations make choices
on allocation of scarce
resources to satisfy
their unlimited wants.
Scarcity forces us to
make choices by
making us decide what
is important to us.
Wants vs. Needs
Need – essential for living
Want – something we desire, but not
necessary for survival.
Goods and services
Limited amounts of resources to supply
goods and services results in scarcity.
Different from shortage
Shortage – consumers want more of a good
or service than producers are willing to
make available at a particular price.
Scarcity always exists
wants of the people exceed
the wants of people in the world are
A scarce resource is anything which
commands a price in economic transactions –
The price may not be limited to currency, it
can relate to resources.
are needed to produce goods and
services that satisfy our wants
What is the main focus
wants are unlimited, the resources to
satisfy those wants are limited.
Scarcity is such an important fundamental
economic concept that some economists
have said that the science of economics
wouldn’t exist were it not for scarcity.
Take risks – to earn profits
Own ideas – patent
Creative new industry – attractive to consumers
Provides economic growth – provides jobs
Factors of production
Land – natural resources
Labor – effort people devote to tasks for
which they are paid. (Education)
Capital – human – made resources that is
used to produce other goods and services.
Physical capital – equipment, tools, building
Human capital - expertise
and natural resources are limited
Capital resources are limited
Labor and entrepreneurial resources are
Time is limited
is no way around this.
What choice will generate the most value?
Gates even deals with scarcity???
Hint – scarcity does not have to relate to a
love to religion, every decision we
make can be understood and describe with
A healthy dose of economic logic can explain
an array of social and behavioral issues –
issues that few people would typically
associate with economics.
Scarcity require answers to three
What will be produced?
How will it be produced?
For whom will it be produced?
to decide who gets what portion of all
resources and goods available.
In our society, money decides who gets what.
because of scarcity
Takes the form of people trying to get more
of the rationing device (money)
Whatever the rationing device is, people will
compete for it.
Section 2: Opportunity Cost
time we choose to do something, we
give up the opportunity to do something
Involves weighing costs and benefits.
of giving up one benefit in order to gain
another, greater benefit.
May also involve values that are not so easy
to measure such as enjoyment, job
satisfaction or the feeling of well-being that
comes from helping somebody.
Businesses & Trade-offs
decisions that businesses make about
how to use their factor resources – land,
labor and capital also involve trade offs.
Government & Trade-offs
state, and local governments also
make decisions that involve trade-offs.
“Guns or butter” – decision of spending
money on military or domestic items
Determining Opportunity Cost
most trade-offs, one of the rejected
alternatives is more desirable than the rest.
The most desirable alternative somebody
gives up as the result of a decision is the
Trade-offs often lead to opportunity cost.
Your decision depended on the specific
opportunity cost – the value to you of what
you were willing to sacrifice.
Trade off – what giving up
Opp cost – value of what giving up
value of the thing that you give up in
order to do something else.
What you give up in order to buy or get the
Making the Decision
each different set of alternatives, the
possible benefits and opportunity costs
change as well.
One thing does not change, though. We
always face an opportunity cost. As
economists say, “Choosing is refusing.”
When we select one alternative, we must
sacrifice at least one other alternative and
Cost Benefit Analysis
makers have to compare the
opportunity costs and the benefits- what
they will sacrifice and what they will gain.
Marginal costs/marginal benefits.