World of Business Unit 1

Scarcity

Resources are limited while human wants and needs are unlimited

| | Economic Problem

How to allocate scarce resources to their most valuable uses

| | Hayek’s Economic Problem

How to make the best use of resources when knowledge about their value and uses is dispersed among individuals

| | Rational Economic Order

An economic system that efficiently uses scarce resources to satisfy people's most important wants

| | Relevant Information

Information needed to know what resources exist, how they can be used, and what people want

| | Preferences

What individuals personally value or want

| | Available Means

All the possible ways resources can be used to satisfy people's wants

| | Hayek’s Central Point

No single person or group can possess all the knowledge needed to efficiently allocate resources

| | Scientific/Expert Knowledge

Organized, technical knowledge possessed by specialists and experts

| | Circumstantial Knowledge

Local, individual, and changing knowledge about specific circumstances that others do not possess

| | “Knowledge of the Fleeting Moment”

Hayek’s description of special local knowledge that changes quickly and is known only by particular individuals

| | Dispersed Knowledge

Knowledge spread among many different individuals rather than concentrated in one mind

| | No Single Mind

Economic knowledge is too dispersed for one person or planner to know everything necessary for efficient allocation

| | Market Economy

A decentralized economy where individuals and firms control resources and coordinate through prices

| | Decentralized Planning

Economic decisions are made by many individuals and firms rather than one central planner

| | Centralized Planning

Economic decisions are made by a central authority or planner

| | Spontaneous Order

A system where individuals coordinate their actions without anyone centrally directing them

| | Decentralized Spontaneous Order

Order that emerges from individuals responding to incentives and information rather than following central commands

| | Price System

A system that uses prices to communicate information about scarcity and coordinate economic activity

| | Price as a Signal

A price communicates information about the relative scarcity or desirability of a resource

| | Price as an Incentive

Prices encourage people to change their behavior because they affect costs, profits, and rewards

| | Bottom-Up Coordination

Economic coordination that emerges from individual decisions rather than central government direction

| | Information Problem

The difficulty of gathering and processing all the knowledge needed to allocate scarce resources

| | Incentive Problem

The difficulty of motivating people to conserve resources, innovate, and use resources efficiently

| | Prices Solve the Information Problem

Prices collapse information about changing supply, demand, and uses into a single number

| | Prices Solve the Incentive Problem

Prices encourage conservation, efficient resource use, and innovation

| | Prices as “Signals Wrapped in Incentives”

Prices communicate information while simultaneously motivating people to respond to that information

| | Economize

To use a scarce resource carefully and avoid unnecessary waste

| | Arbitrage

Buying something where it is cheaper and selling it where it is more expensive to profit from a price difference

| | Hayek on Arbitrage

Arbitrage is socially useful because arbitrageurs use local knowledge to move resources toward more valuable uses

| | Centralized Planning Challenge

A central planner would need enormous amounts of information about resources, preferences, substitutes, and possible uses

| | Truthful Information Problem

People may have incentives to exaggerate how much they value a resource when reporting information to a central planner

| | Milton Friedman’s “I, Pencil”

Illustrates how markets coordinate millions of people who may never meet to produce a simple product

| | Voluntary Cooperation

People cooperate through mutually beneficial exchanges without needing a central authority to direct them

| | Aggregation of Knowledge

Markets combine the separate knowledge held by many individuals through voluntary exchange and prices

| | Property Rights

Rights that determine who has authority to use, benefit from, and transfer a resource

| | Exclusive Authority

The property-right holder has the authority to decide how a resource is used

| | Right to Services of a Resource

The owner has the right to receive the benefits or income generated by the resource

| | Right to Exchange

The owner can sell, rent, transfer, or give away the resource or its rights

| | Three Basic Private Property Rights

(1) Choose the use, (2) receive the services/benefits, (3) exchange the resource

| | Property Rights & Prices

Property rights allow resources to be privately controlled and exchanged, connecting resources to market prices

| | Tragedy of the Commons

Overuse of a resource can occur when property rights are absent or resources are commonly owned

| | Artificial Scarcity

Scarcity created or maintained by social/economic systems rather than by an actual physical lack of resources

| | Robin Cox’s View of Artificial Scarcity

Capitalism can create artificial scarcity because production is driven by profit and effective demand rather than simply human need

| | Effective Demand

Demand backed by the ability and willingness to pay a price that allows producers to earn a profit

| | Profit

Revenue exceeding costs; in Cox’s argument, profit is the central driver of capitalist production

| | Socially Useful Production

Production that satisfies genuine human needs

| | Socially Useless Production

Production or economic activity that does not directly satisfy genuine human needs but serves the needs of the economic system

| | Artificial Needs

Wants encouraged by society or consumer culture that may go beyond people's basic needs

| | Consumer Culture

A culture that encourages people to continually desire and purchase more goods and services

| | Relative Deprivation

Feeling deprived because others possess more, even when one's own basic needs are met

| | Scarcity — Traditional Economics

Scarcity exists because resources are limited relative to unlimited wants

| | Scarcity — Cox’s Argument

Some scarcity may be artificial because resources and production can be directed toward profit rather than satisfying real needs

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