Econ 2 Files
Econ 2 Lecture
Notes
Lecture 2: Scarcity and Choice
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Economics 2 |
Lecture 2: Scarcity and Choice
scarcity
opportunity costs
marginal costs and marginal benefits
Scarcity
Economics is
the study of the allocation of scarce resources among competing and insatiable needs so as to maximize welfare.
We assume that people act in their own rational self-interest. People make the choices they believe leave them best off.
Economics resources are used to produce goods and services. There are three categories of economic resources:
- land - raw materials and natural resources
- labor - workers
- capital - buildings, machinery, factories, equipment
Each of the resources exists in a finite, limited quantity.
We assume that people have unlimited wants. There is always something that people want to have more of. Since we have a limited amount of resources, we can produce a limited amount of goods and services. No matter how large that amount is, we cannot produce enough to satisfy everyone's unlimited wants. This is known as scarcity and much of economics looks at how people cope with scarcity.
Opportunity Costs
Because resources are scarce, people must make choices. A choice is a comparison of alternatives. Every choice has an opportunity cost. Opportunity cost is the value of the next best alternative. For example, suppose I had a choice of having oatmeal, Wheat Chex, or Raisin Bran for breakfast. Since I chose Raisin Bran, my opportunity cost is oatmeal or the Wheat Chex, whichever I most prefer.
For an accountant, the cost of an activity is the out-of-pocket expenses, all of the money paid to undertake the activity. For an economist, the cost of an activity is everything given up for it, including opportunity costs. For example, what are the total costs of a college education?
| tuition | $46,000 |
| books | 3,200 |
| beer costs | 3,200 |
| transportation | 2,400 |
| opportunity costs | 72,000 |
| total costs | $126,800 |
Instead of attending college you could be doing something else such as working or backpacking across Europe. That something has a value to you; the value of whatever you would have done if you had not attended college is the opportunity cost of going to college.
Let's say you would have found a job at Sheetz and would have made $18,000 a year. Then, your opportunity cost of attending college would be the wages you could have earned instead: $18,000 a year for 4 years is $72,000.
Marginal Costs and Marginal Benefits
Most decisions are not of the all or nothing variety. Most decisions involve choosing a little more or a little less of something. Rational decision making involves comparing the costs and benefits of that incremental change. The cost of obtaining one additional unit of a good or service is called the marginal costs. The benefits obtained from consuming one additional unit of a good or service are called the marginal benefits. If the marginal benefits are greater than the marginal costs, it makes sense to purchase another unit of the good; when the marginal benefits are less than the marginal costs, then you do not purchase another unit of the good.
Should you have come to class today? Let's compare the marginal costs and benefits.
| gas, other car expenses | $2.50 |
| paper & ink used | 0.25 |
| opportunity costs (working) | 8.00 |
| total marginal costs | $10.75 |
| knowledge | $0.25 |
| higher lifetime income due to better economics grade earned because you learned about opportunity costs in class today |
1.15 |
| were able to socialize with other students | 1.00 |
| being in the same room with me for 50 minutes | 8.36 |
| total marginal benefits | $10.76 |
So, properly measured since the marginal benfits of attending class today are greater than the marginal costs, rational behavior dictates that you should have come to class today.
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David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (717) 771-4062 e-mail: 
web: www.yk.psu.edu/~dxl31 |
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