Scarcity and Opportunity Cost

Needs vs. Wants

• Needs are necessary for survival (Ex. Food, Water, Air, Clothing, Shelter)
• Wants are not necessary for survival but help create a comfortable standard of living (Ex. Phone, TV, Car)

 

Scarcity

• Scarcity means that we have limited/scarce resources to pursue our unlimited wants (not needs)
• In other words, we can’t have everything we want all the time.
• As a result, we are forced to make choices.
• This is what Economics is all about, understanding how people, businesses, and governments choose to deal with scarcity.
• Scarcity is fundamentally the most important concept in economics.
• Scarcity exists because human wants exceed the productive capacity of the economy.
• Scarcity is not necessarily universally true, especially for all times, all places, and all goods.
• If a person gives up nothing to obtain more of the good, then it is not scarce.

 

Factors of Production

• Think of the Factors of Production as categories of resources (inputs) that are used to produce output (finished products).  There are 4 Factors of Production:
  1. Land – is the factor of production that represents all the natural resources (raw materials) that exist in our world.  These natural resources are sometimes called the “gifts of nature.”  Examples include:
     1. fertile soil
     2. rain/fresh water
     3. trees/lumber
     4. cattle/livestock
     5. fossil fuels/petroleum
  2. Labor – is the factor of production that represents all the knowledge, skills and effort put forth by humans in the production of a finished product.
     1. the knowledge, skills and effort of a worker are often referred to as “human capital”
     2. human capital is developed through education and training
  3. Capital – is the factor of production that represents all the manufactured goods that help convert raw materials into finished products. Examples include:
     1. machines
     2. equipment
     3. tools
  4. Entrepreneurship – is the factor of production that represents the human resources of organizing, managing, and assembling the other factors of production into what they hope will be a successful business.
     1. The most important characteristics of the entrepreneur:
        1. risk taking
        2. innovation

 

Tradeoff

• A tradeoff occurs when you give up one thing in order to get another.
• It echoes the basic fundamental principle of scarcity that says we can’t have everything we want all the time.
• A tradeoff is different than the opportunity cost because tradeoffs are not measured.

 

Opportunity Cost

• Because of scarcity we are forced to make choices
• When we choose to do one thing we are sacrificing the opportunity to do something else.
• The specific value of what’s been sacrificed is the opportunity cost when making a decision.
• Opportunity Cost can been defined a few different ways:
  • It is the amount of one thing that must be given up/forgone in order to get a certain amount of something else.
  • It is the amount of one product that must be given up in order to produce an additional unit of another product.
  • It is the value of the next best alternative that is forgone when an activity is pursued
• Opportunity Costs are specific to the choice in question.
• Whenever a choice is made, an opportunity cost is incurred.
• The concept of opportunity cost would no longer be relevant if the supply of all resources were unlimited.

 

• Opportunity Costs can be calculated, here are some examples to help figure out how:

 

• After graduating from high school, Peggy Smith decided to enroll in a two-year program at the local community college rather than to accept a job that offered a salary of $12,000 per year. If the annual tuition and fees are $4,600, the annual opportunity cost of attending the community college is

  (A)$4,600

  (B)$7,400

  (C)$12,000

  (D)$16,600

  (E)$24,000

 

• Karen works part-time at a local convenience store and earns $10 per hour. She wants to spend next Saturday afternoon attending a music concert. The full price of a concert ticket is $75, but Karen was able to get a discounted price of $50 from a friend who purchased the ticket but has become unable to attend. If Karen took 4 hours off from her job to attend the concert, what was her opportunity cost of attending the concert?

  (A)$40

  (B)$50

  (C)$75

  (D)$90

  (E)$115

Click Here to Take the Online Quiz

• Remember, the email address to login to take online quizzes in not the 7 digit student ID@hcps.net. It is the email address you typed into the new student info form on the first day.