Week One Scarcity and Choice

Economics week one

What does scarcity mean

Lack of resources

Fundamental Economic Problem

• Basic problem which economics addresses is that of scarcity

• the desires of the human race are infinite but earths resources are limited

• in an environment where infinite wants chase finite resources, we are forced to make choices

the key choice in economics relate how society decides

• what to produce

• how to produce

• for whom to produce

• there are differing ways of answering these questions. At one extreme we could let the market decide and at the other end of the spectrum we could let the government decide.

• the various ways of answering the economic problem vary with differing countries.

Economic Systems

North Korea/Cuba are communist or command economies where,who,what and for whom is governed by the state. USA/UK/Singapore are free market or capitalist economics.

Most economies are mixed e.g. some state involvement

What to produce?

• we have a choice as a society as to what to produce

• the green lobbyists suggest we should produce more green energy

• in the free market what to produce is governed by individuals

• As we spend our income, we determine what is produced. consumer demand is evidenced through the price system

• this is termed consumer sovereignty

• governments have a role to play in many economies by directing their spending to particular products

• production therefore reflects spending

how to produce

Organised in a variety of ways:

• Handcrafted or mass produced

• Home or abroad

These decisions are usually the choice of private business who enter the productive process to make profit, so the most profitable methods of production are the ones adopted.

The more efficient firms could be expected to make higher profit (because of research done)

What message does Loss send

Sends an important message that resources are being used inefficiently and need to be used in other profitable endeavours.

Successful firms efficiently convert spending into output and profit

This need not to be the case as the government can fund or direct production

For whom to produce

• Spending and consumption are related to income. Those with the highest incomes can the consume the most should they choose

• In an ideal world, the most productive would receive the highest income

• spending is dependent on income in the long run. Income in turn depends on those who have income earning assets or those who earn due to valued skills

• High income results in spending means power in the market

Scarce Resources = Factors of Production

For goods and services to be produced, the factors of production need to be employed.

• Land - physical area, raw materials

• Capital - factories, infrastructure, technology

• Labour - labour force

• Enterprise - organisation force

• Potential fifth - Knowledge

Land

• Natural resources/ space

• Earns rent (type of income)

• Limited by finite resources

Labour

Earns=

• Skills, Abilities and qualifications of a population

• Limited by level of high-level skills, qualifications and motivation

Capital

• Any man-made productive resources e.g. machines

• Earns interest

• must earn enough to cover investment

Enterprise

• Enterprise

• Entrepreneurs

• Entrepreneurship

• Organisational skills

• Earns Profit

What, How and for whom: Sequence:

Income depends on:

• Ownership and supply of the factors of production

• Developing income earning assets or those who have developed highly valued skills

• Entrepreneurs who established new businesses and earn profit 

High income results in spending means power in the market

Production mirrors the spending of consumers

Successful firms efficiently convert spending into output and profit. (produce at low cost = most efficient)

this is an example of spontaneous order!!!

Spontaneous Order definition

An order which emerges as result of the voluntary activities of individuals and not one which is created by a government, is a key idea in the classical liberal and free market tradition

What makes a resource scarce

In an environment where infinite wants chase finite resources a system of allocation is needed. A market develops, and a price is changed

Opportunity cost definition

the cost of any activity measured in terms of the best alternative forgone

Example of Opportunity Cost

What is the ‘best alternative’ you gave up attending this lecture today?

To go to the cinema with friends, you give up time that could have been spent with family

Rockets and guns have an opportunity cost of kidney machines

what is an economic model?

simplified framework when considering two goods

Economic model assumptions

• only 2 goods, A and B are produced

• a fixed amount of resources is available

• increasing the output of A means reducing the output of B

• why?

• More A output needs more resources, which can only come from producing less B (remember resources are a fixed amount)

• In reality goods A and B will have monetary values

• But! Opportunity cost is measured in real resource values:

• i.e. (no. of units of output, rather than their cost)

(time taken rather than wage per hour)

• everything that we do as individuals, firms or government has an opportunity cost, due to resource scarcity.