"Scarcity and Decision Making - PowerPoint"
Scarcity and Decision Making CIE3M0 The Individual and the Economy What is Economics? Economics is the study of financial systems, government influence, and how consumer choices affect production, distribution and consumption of goods and services. Wants Physical Wants – needs that are necessary to sustain life (e.g. food, clothing, shelter) Psychological Wants – wants that are not essential to sustain life (e.g. gold jewelry) Goods and Services Goods – concrete visible things that satisfy human wants and that last a period of time. Services – invisible things that cannot touched or seen (e.g. concert) Human Resources – labour needed to produce goods and services (e.g. teacher) Resources Capital Resources – non- human processed resources used to produce goods and services (computers, factories, etc…) Natural Resources – land and all unprocessed non-human resources used to produce goods and services Price is determined by scarcity Depending on how scarce a good, service or resource is, a certain price is assigned based on what people are willing to pay. All goods and services are evaluated against each other to determine an appropriate price. Gold, for instance, is much more scarce (or rare) than sand, and therefore has a much higher price. Read Chapter 1 Answer questions 1,2,3 on pages 6 and 7 Seawater in Saskatchewan. Is it scarce? To be scarce, something has to be in short supply. Seawater is in short supply in Saskatchewan. But, in order to be scarce, a resource must also be something that people actually want. There is really no use for seawater in Saskatchewan. Therefore, seawater is not considered by economists to be scarce in Saskatchewan. ScarcityDecision Making Opportunity Cost Human Wants > Resources = Scarcity Because of scarcity, we are required to make (economic) decisions. Opportunity Cost Opportunity Cost – the decisions will mean we have to give up something to gain something else (e.g. Mr.Harper wants to go to Hawaii during the March Break but it will mean that he would not be able to afford a new big screen TV if he went) A side note about Scarcity …and Opportunity Cost In some places in the world, people sell their human resources (in a literal way), meaning their internal organs. In Canada this is illegal, because poor people could be easily persuaded for relatively little money. Healthy organs are scarce, especially if you have unhealthy ones. A wealthy person could be willing to spend thousands of dollars on a new kidney. Their opportunity cost is high. The opportunity cost of giving up a kidney for someone who is living in poverty could very well be much lower. More on Opportunity Cost Let's say that students had the option of not attending class, so long as they paid $1 for each class skipped. Would you participate? This is an example of opportunity cost, because the $1 fee is very low, and represents the same cost as a chocolate bar or a can of pop. Your opportunity cost of spending our class time chillin wit yo homies (sorry), is the cost of a chocolate bar or a pop. What would you value more? But…what if? Now, if the same option existed, but the cost to skip class was $50, the opportunity cost is much higher, because it now represents dinner for two at a fancy restaurant (like the Pickle Barrel). Is one skipped class worth the cost of a super fancy dinner? It's important to understand that each person is willing to spend a different amount to do different things, depending on what you have and what your wants are. What are the opportunity costs of the U.S. war in Iraq? $2,000,000,000,000 could have been spent on: Eliminating extreme poverty around the world (cost $135 billion in the first year, rising to $195 billion by 2015.) Achieving universal literacy (cost $5 billion a year.) Immunizing every child in the world against deadly diseases (cost $1.3 billion a year.) Ensuring developing countries have enough money to fight the AIDS epidemic (cost $15 billion per year.) And there would still be money left over. The opportunity cost of the war in Iraq, is represented by the previous 4 items combined…perhaps a reason why many oppose the war. The war is estimated to cost in excess of 3 trillion dollars before it's over. So, after all of these opportunity costs, we can add another 1 trillion dollars to throw around. That's an expensive war! Macroeconomic opportunity costs: – Governments regularly have to make decisions involving opportunity cost Military Education Health care Transportation These cannot all be funded without sacrifices being made in other areas. A wants and needs example On the weekend, Mr.Harper was asked for money by a gentleman on the street. The man wore dirty, torn clothing, and presented himself as being very down on his luck and lacking the resources he needed to survive. When Mr.Harper politely declined the gentleman’s request, the gentleman said “but I just want to buy a coffee”. Mr.Harper thought to himself, “my change is not a physical need for you, it is a psychological want”, and then briskly walked away before being harassed any longer. Why did Mr.Harper do this? Because he's a jerk? No! Because a few minutes earlier, Mr.Harper had walked by and witnessed the street gentleman talking on his new mobile phone. Mr.Harper did a brief opportunity cost calculation in his head and determined that if the poor man can afford a mobile phone, he can afford a coffee. Additionally, the coffee was not a physical need, because if it were, most people would make the economic decision to sell their phone (a psychological want) in order to finance a physical want. Decision Making Volunteer needed How much money would you make in an hour if you were picking up money as a job? How often do you make impulse decisions? Do you always feel good about them afterwards? A reason why you may not feel good about impulse decisions is because afterwards you have an opportunity to think about what opportunity cost you gave up in order to buy something on impulse. Summary Resources – Human / Capital / Natural Wants > Resources = Scarcity Scarcity Decisions Opportunity Cost Opportunity Costs – Goods & Services Mr.Harper likely would have given this man some change (despite his poor apostrophe use)