The Economic Problem: Scarcity and Choice
You have $\$200$ in weekly allowance: it's enough to go to the movies or to buy a T-shirt you saw at the street market, but not both. That very common situation is the starting point of economics: neither money, nor time, nor a country's resources are enough for everything we want. By the end, we'll see how to decide well in cases like this.
Scarcity and Choice
Economics studies how societies satisfy their needs through the production, distribution, and consumption of goods and services. And they do so in a world where resources are limited.
A need is something without which you cannot function normally (food, water, medical care); a want improves your well-being, but you can do without it. The same object can be one or the other: a computer is a need for someone who studies and works with it, and a want for someone who just wants a newer model.
Societies deal with scarcity by deciding what to produce, how to produce it, and for whom. These decisions have a social impact (who gets access to what) and an environmental impact (how many natural resources are used up and how much pollution is created).
Explain what scarcity is and why it forces us to choose. Illustrate this using your weekly allowance: two things you would like to buy, which one you give up if you…
Explain what scarcity is and why it forces us to choose. Illustrate this using your weekly allowance: two things you would like to buy, which one you give up if you choose the other, and what that means.
Opportunity Cost
When you choose, you always give something up. The important thing is to know what.
Define opportunity cost and calculate it in this case: on Saturday you can go to the cinema ($\$160…
Define opportunity cost and calculate it in this case: on Saturday you can go to the cinema ($\$160$ per ticket) or to your cousin's birthday party, but not both. If you choose the cinema, what is your opportunity cost? Explain why it is not just the price of the ticket.
For the end-of-year trip, your class has $\$20\,000$ and three options: (a) a day at the theme park ($\$20\,000$), (b) two days of outdoor adventure with hostel stay…
For the end-of-year trip, your class has $\$20\,000$ and three options: (a) a day at the theme park ($\$20\,000$), (b) two days of outdoor adventure with hostel stay ($\$18\,000$), or (c) a day out together at the beach ($\$6\,000$) and donating the remainder to the local soup kitchen.
- a) Calculate the opportunity cost of each option in pesos and in experiences.
- b) Choose one option and defend it, arguing what values guide your decision beyond money.
'This app is free.' A social network does not charge for its use, but it displays adverts and tracks everything you look at. Analyse what you are really paying for this…
'This app is free.' A social network does not charge for its use, but it displays adverts and tracks everything you look at. Analyse what you are really paying for this 'free service', who benefits, and how this relates to the idea that making choices always incurs a cost, even when there is no price tag.
The Production Possibilities Frontier
A school cooperative has a small workshop for the bake-sale-style school bazaar and can make bracelets, keychains, or a mix. The production possibilities frontier (PPF) is the curve that shows the maximum combinations of two goods it can produce using all of its resources. A point on the curve uses resources efficiently; a point inside it wastes resources; a point outside it can't be reached with what is available.
You just need to know how to read it: as you move along the curve, to have more of one good you produce less of the other, and the amount you give up is the opportunity cost. In a table of combinations (bracelets, keychains), you find it by subtracting: if you go from $(20, 50)$ to $(35, 35)$, you gain $15$ bracelets and lose $15$ keychains.
The curve bows outward because the opportunity cost increases: resources are not equally suited to everything, and the last few bracelets require moving people who were very good at making keychains.
The school cooperative divides its small workshop between making bracelets and making keyrings for the market. The diagram shows its production possibility frontier with…
The school cooperative divides its small workshop between making bracelets and making keyrings for the market. The diagram shows its production possibility frontier with three marked combinations: A, B, and C.
- a) Explain what each point — A, B, and C — indicates about how the workshop is using its resources.
- b) At point A, $40$ keyrings and $30$ bracelets are produced per day. What would the cooperative have to sacrifice to make more keyrings? What is this sacrifice called?
Each day, the cooperative can produce these combinations of bracelets and keyrings: $(0, 60)$, $(20, 50)$, $(35, 35)$, $(45, 15)$, and $(50, 0)$, where the first number…
Each day, the cooperative can produce these combinations of bracelets and keyrings: $(0, 60)$, $(20, 50)$, $(35, 35)$, $(45, 15)$, and $(50, 0)$, where the first number is bracelets and the second keyrings.
- a) Calculate the opportunity cost, in keyrings, of moving from $20$ to $35$ bracelets.
- b) Calculate the opportunity cost of moving from $45$ to $50$ bracelets and compare both stages: does increasing bracelet production become increasingly costly? Why do you think this happens?
Thinking at the Margin
Most decisions are not "all or nothing," but "one more?": one more hour of studying? One more soccer game? Thinking in marginal terms means comparing the additional benefit of one more unit with its additional cost. It makes sense to keep going as long as the benefit is greater than the cost; when they are equal, you have reached the optimal point.
You are considering studying for 'one more hour' before the math exam. That hour would come out of your basketball practice. Explain what the marginal benefit and…
You are considering studying for 'one more hour' before the math exam. That hour would come out of your basketball practice. Explain what the marginal benefit and marginal cost of that extra hour compare (thinking 'at the margin'), and argue at what point studying for another extra hour would no longer be worth it.
Incentives
People respond to what is in their interest. An incentive changes the cost or the benefit of an option: through a price (charging for plastic bags) or a reward (points for recycling).
When something scarce is free, it gets handed out on a first-come, first-served basis or according to who has time to wait, not according to who needs it most. A price changes that distribution, but it can leave out people with lower incomes.
Go back to the beginning: with your $\$200$ you choose by comparing the benefit of each option with what you give up. That small decision is already economics.
The school canteen used to give away free plastic bags and used $500$ a week; since it started charging $\$2$ per bag, it uses $50…
The school canteen used to give away free plastic bags and used $500$ a week; since it started charging $\$2$ per bag, it uses $50$. Explain what an incentive is and how it worked in this case, and propose two incentives (one reward-based and one price-based) to get students to recycle more in the schoolyard.
In a coastal town, parking next to the beach used to be free, and in August it was impossible to find a space. The municipality set a price of $\$40…
In a coastal town, parking next to the beach used to be free, and in August it was impossible to find a space. The municipality set a price of $\$40$ per hour, and now residents are debating: some say that 'the beach belongs to everyone' and others that 'at least this way there is turnover and spaces open up'.
- a) Explain the underlying economic problem when a scarce resource has a zero price tag.
- b) Analyze what incentives the new measure creates and propose an alternative way to allocate the resource without using prices, weighing its pros and cons.