Economics: Scarcity and Rational Choice

Economics: The Study of Rational Choice Under Scarcity

Economics is not just about money; it's a broader set of tools applicable to daily decisions.
Economics is defined as the study of rational choice under conditions of scarcity.

Scarcity means an imbalance between the amount of something people want and the amount that's freely available.
To understand scarcity, consider something that isn't scarce.
- Air might seem not scarce, but clean, breathable air is scarce, especially in polluted cities.
  - Example: In Tokyo, vending machines once sold breaths of clean air.
- Space might seem plentiful, but space in cities or dorm rooms is limited.
- Garbage might seem abundant, but there's a limited amount. The reason garbage isn't scarce is that nobody wants it.
When something is scarce, decisions are needed on how to use it, share it, and allocate it among competing uses.

Rationality in economics means people make calculated, self-interested decisions.
It involves considering costs and benefits and choosing the action that is most satisfying.
- Maximizing wealth.
- Maximizing company profits.
- Maximizing satisfaction from limited income or time.
A rational agent considers cause and effect and chooses actions that provide the most satisfaction.
Rational choice is calculated self-interest.
If we have calculated self-interested people operating in a situation of scarcity, then we've got economics.

When people make a choice, they consider the opportunity cost of that choice
The opportunity cost of a choice is the best alternative you give up when you make that choice.
- Example: Attending economics class means giving up an extra hour of sleep.
- Example: Enrolling in college provides education and future higher salary, but the opportunity cost is money not earned now.
Being in school means lost income and lost immediate satisfaction.
The opportunity cost of investing in your future is the present satisfaction you could get from a higher paycheck.
There's no such thing as a free lunch.
Example: Driving a pickup versus driving a Volkswagen.
Example: Vacation to the Bahamas versus trip to California.
Every choice involves an opportunity not chosen.

Economics is not about money; it's about analyzing how people make choices in conditions of scarcity.
Economic models can predict:
- How people use time between studying, working, playing, and socializing.
- Who people choose to marry.
- When countries go to war.
- Which religions people affiliate with.
- Even who chooses to commit suicide (as a calculation of costs and benefits).
Economics is a flexible set of tools applicable anywhere rational agents operate in a situation of scarcity.
It applies wherever goods and services are strictly limited and must be shared.
Next lecture: Another definition of economics related to value.