Scarcity and Choice
Raymond P. H. Fishe
Foundation for Teaching Economics
• All resources are limited
• So, people cannot obtain all that they
– they must make a sacrifice
– or in more economic terms, “Pay a Cost”
• Scarcity forces YOU to choose among
• Choosing among alternatives creates an
• Opportunity Cost is the value of the “Next-
• Higher or lower Opportunity Costs can
cause YOU to change your choices
– When do you change lanes in traffic?
– When do you exceed the speed limit?
– If you pass a traffic policeman, do you slow
• An early “Prom” proposal
– What’s the best response?
» What’s the opportunity cost of accepting?
» What’s the opportunity cost if refusing?
» How can you lower your opportunity cost?
– How does your view change as the Prom
– Decisions are made at the “margin”
• Zebra’s and Lions do it, too
– How fast do they run?
– Why do they wait?
• How do YOU make choices?
• Rationality: You maximize in making your
• Maximization implies that YOU use
• Marginal Benefits are compared to Marginal
Cost (Ex. “Dating…”)
– MB > MC, then stay with the guy
– MB < MC, then look around
Who Wants to be an “Econ”
Why do movie and rock stars seldom get
(a) They are not smart enough to get into college.
(b) They get tired of crowded classes and homework.
(c) They can’t pay the tuition.
(d) Their time is too valuable to sit in a
• Scarcity causes goods and services to be
• How to ration “COOL” stuff?
• Define the rationing mechanism
• Define the rules of play
– Who is eligible?
– What is fair play?
– Is there any way to change the rules?
• Who decides on the mechanism?
• First-Come, First-Served
• Merit or Need
• Arbitrary - Age, Hair Color, Shoe Size
• Price--a Market System
• Others: Lottery, Auctions, Share
Equally, Electing or Appointing a
Advantages of a Price System
• Anonymous - Participants may not
know each other’s characteristics
• Market provides variety
• Compare relative prices (i.e.,
• Common Currency - No question of
• Individual choice to participate
• Individuals Maximize Subject to Constraints
• Price System - Income & Time are Two
• Solving Individual‘s Maximization Problem
Creates Demand Function
• Demand Function Shows How Much Is
Purchased At Various Prices, Income, and
The Demand Curve Shows How
Quantity Demanded Changes
Price With Price
P Demand is a function
of Price, Income, and
the Prices of Substitutes
Q Per Period
• How Responsive is Quantity
Demanded to a Change in Price?
• Elastic: %Q > %P
• Inelastic: %Q < %P
Price The More Elastic The Demand
Per Curve the Greater Is The
Unit Response to a Price Change
Q Q0 Q1 Per Period
Think Some More
• Problems with Price System
– Asymmetric Information - Need Facts to
Define Individual Benefits (Car Repair)
– External Benefits and Costs are Ignored
• How Do We Ration the Airwaves?
• PCS Auctions
• FCC Proposal - Require 3 Kid’s Shows
per Week During Prime Time