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					Scarcity and Choice

    Raymond P. H. Fishe

 Foundation for Teaching Economics
               Scarcity

• All resources are limited
• So, people cannot obtain all that they
  want
  – they must make a sacrifice
  – or in more economic terms, “Pay a Cost”
• Scarcity forces YOU to choose among
  alternatives
                    Choices

• Choosing among alternatives creates an
  Opportunity Cost
• Opportunity Cost is the value of the “Next-
  Best” choice
• 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
    down?
    Other Examples
• 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
    approaches?
  – Decisions are made at the “margin”
• Zebra’s and Lions do it, too
  – How fast do they run?
  – Why do they wait?
         Marginal Analysis

• How do YOU make choices?
• Rationality: You maximize in making your
  choices
• Maximization implies that YOU use
  Marginal Analysis
• 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”
     Millionaire?

Why do movie and rock stars seldom get
college degrees?
(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
    classroom.
                  Example

• Scarcity causes goods and services to be
  rationed (…Somehow)
• 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?
            Rationing Methods

• 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
  Decision-Maker
 Advantages of a Price System

• Anonymous - Participants may not
  know each other’s characteristics
• Market provides variety
• Compare relative prices (i.e.,
  opportunity cost)
• Common Currency - No question of
  value
• Individual choice to participate
                Demand

• Individuals Maximize Subject to Constraints
• Price System - Income & Time are Two
  Important Constraints
• Solving Individual‘s Maximization Problem
  Creates Demand Function
• Demand Function Shows How Much Is
  Purchased At Various Prices, Income, and
  Relative Prices
            Demand Curve
            The Demand Curve Shows How
             Quantity Demanded Changes
Price                 With Price
Per
Unit



                                             However,
        P                             Demand is a function
                                      of Price, Income, and
                                     the Prices of Substitutes
                                       and Complements.


                                D             Quantity
                                              Demanded
                   Q                          Per Period
            Elasticity

• How Responsive is Quantity
  Demanded to a Change in Price?
• Elastic: %Q > %P
• Inelastic: %Q < %P
        Comparing Elasticities

Price                     The More Elastic The Demand
Per                         Curve the Greater Is The
Unit                       Response to a Price Change
              D0




    P

                                       D1
                                            Quantity
                                            Demanded
                   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

				
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