Lesson 1: Scarcity and Choice

 

Scarcity and Choice

Key Terms

• Demand
• Supply
• Scarcity
• Trade-offs
• Opportunity Cost
• Marginal Costs/Benefits

National Content Standards Addressed:

Standard 1 - Productive resources are limited. Therefore, people cannot have all the goods and services they want; as a result, they must choose some things and give up others.

Standard 2 - Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Most choices involve doing a little more or a little less of something: few choices are "all or nothing" decisions.

Standard 3 - Different methods can be used to allocate goods and services. People acting individually or collectively through government must choose which methods to use to allocate different kinds of goods and services.

Lesson Objectives (7)

1. Define scarcity and give examples.
2. Establish causation: Scarcity necessitates choice; therefore trade-offs cannot be avoided.
   • Discuss rationing - relate to scarcity and choice.
   • Ration CDs, (see Teaching and Discussion Idea #1 below) or list and describe several methods of rationing.
3. Define opportunity cost.
   • Differentiate between trade-off and opportunity cost: the cost is the "next-best" alternative.
   • Offer other ways to conceptualize cost: "Choosing is Refusing" or "Cost is the foregone alternative."
4. Develop examples to illustrate the characteristics of cost.
   • All costs are costs to the decision-maker and are thus subjective in nature: costs are "to" someone.
   • Only actions have costs; "things" have no cost independent of decisions about using them.
   • All costs lie in the future; the anticipation of future consequences shapes peoples' decisions.
   • Emphasize that "consequence" and "opportunity cost" are different.
5. To the decision-maker, the relevant value of something is its marginal value.
   • Define marginal as additional, or "a little more or a little less," or "the next unit."
   • A person’s willingness to bear costs is situation-specific: the marginal value of a cup of water is very low to those who can quickly obtain it with the turn of a faucet; it’s value is high to someone dying of thirst in a desert.

6. Prices reflect opportunity costs and help buyers make decisions.
   • Cost and price are not the same, in economics terms.
   • A rising price (or a high price) means that buyers must bear higher opportunity costs: they must give up more to obtain something. All other things being equal, they will choose to buy less.
   • A falling price (or a low price) means that buyers bear lower opportunity costs: they must give up less of other things to obtain something. They will choose to buy more.
   • Law of Demand.

7. Prices reflect opportunity costs for suppliers, too.
   • Suppliers make choices; they could supply other things.
   • Develop examples.
   • As the opportunity cost of supplying things to others decreases, people are willing to supply more.
   • As the opportunity cost of supplying things to others increases, people are willing to supply less.
   • Law of Supply.

Teaching and Discussion Ideas:

Bring 3 CDs, of various types of music, to the lecture. Ask if anyone wants them. Presumably, more than one person will want each one and then you can ask the class how to solve the dilemma. What process and/or criteria should be used to distribute or ration the CDs?

• Examine the nature of the different possibilities: first-come-first-served, lottery, contest or winner-take-all, money-price, need, auction, sharing equally, etc.
  (corresponds with lecture objective #2)

Sample Interactive Discussion Problems:

1. Give a student the choice of a package of gum or a candy bar. What did he choose? What did he refuse; what is his opportunity cost?
   • Poll other students to see if they would make the same choice. How and why would students’ opportunity costs vary?
   • Emphasize that the opportunity cost (what is refused or given up) may change as the available alternatives change and as people's tastes change.
   • Next, take from a bag an old (and sweaty?) T-shirt that you brought with you and offer to sell it.
   • Why will nobody buy it?
   • Is it’s value different if it belonged to Brad Pitt or Brett Favre instead of belonging to you? Why?
   • Give a student the choice of the old T-shirt or a new one.

     Which did she/he choose? Which did she refuse?
     What was her opportunity cost to obtain the new shirt?
     Was that a high or low cost?

   • Emphasize that "Choosing Is Refusing." What you give up - or refuse - is your opportunity cost (and your perceptions determine its value).

2. Bring three similar, but not identical, items to give away. (Candy bars, donuts, cans of pop all work well.)
   • Ask a student to choose which of the three items he wants.
   • Discussion: Was his choice "free," or was there an opportunity cost?

Sample Small Group Discussion Problems

Pose problems incorporating the idea that benefits and costs are relative to specific situations and to individual perceptions:

Use opportunity cost to explain:

1. why farmers often wait until a rainy day to do errands in town, while a man in a new suit will decide to forego his errands on the same day;
2. why a highly talented person who travels a lot might hire a chauffeur;
3. why businessmen often buy full-fare airline tickets while people planning vacations fly when rates are lowest;
4. why Americans today find themselves much more pressed for time than their great -grandparents were, despite the fact that we have so . many machines and appliances that save us labor and time;
5. why young women in India cut the grass surrounding the Taj Mahal with kitchen shears rather than using lawn mowers;
6. why movie stars, fashion models, and rock singers have higher divorce rates than the rest of the American population.

Pose a problem for a small-group discussion, that encourages students to consider that changing prices reflect changing opportunity costs.

1. Much housing in Miami was destroyed by Hurricane Andrew; what happened to the cost to tenants of renting an apartment? What happened to the cost to landlords of renting space to any particular tenant?
2. A store owner buys a truckload of last year’s very popular style of jeans and puts them on display in his store. Plaid flannel pants are the rage this year and most people walk right by the jeans display to stand in line to buy plaid flannels.
   • What is the cost to the store owner of selling a pair of plaid pants to any particular buyer?
   • What is the cost to the store owner of selling a pair of jeans to any particular buyer?
   • Over the year, what happened to the cost to buyers of purchasing a pair of jeans?
   • What happened to the cost to the seller of NOT selling a pair of jeans to any particular seller?
   • What caused costs to change?

Definitions

Demand - The relationship between prices and the corresponding quantities of a good or service buyers are willing to purchase at any given point in time.

Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.

Marginal cost - The increase in total cost that results from producing an additional unit.

Opportunity cost - The most highly valued sacrificed alternative; the value of the "next-best" choice.

Scarcity - Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost. Scarcity defines a relationship - between the amount of something we want and the amount that is available.

Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.

Trade-off - A choice between alternatives that reveals the opportunity cost of selecting one alternative over the other.

 

Copyright © 1999 Foundation for Teaching Economics
Permission granted to copy for classroom use.