Scarcity and Economic Principles

Scarcity

• Scarcity is the concept that society's unlimited wants exceed its limited resources.
• Scarcity forces trade-offs, which is a core concept in economics.
• Scarcity is the fundamental problem that gives rise to the field of economics.

Economics as the Study of Human Behavior

• Economics at its core deals with the study of human behavior.
• Economists analyze decisions, like how long a homeowner waits to mow their lawn.
• The study of economics includes business and finance, but it's much broader.
• Economics extends to animal behavior like how rats respond to changes in the price of food.
• When the price of food increases, rats will consume less.
• In economics class, the focus will be on human behavior.
• Economics involves studying how people make different kinds of decisions.

Ten Basic Principles of Economics

• The principles are fundamental concepts in economics, applicable in micro- and macroeconomics and various sub-disciplines.

People Face Trade-offs

• To get something you want, you typically must give up something else you also want.
• Trade-offs exist at the individual level, like spending income on one item versus another, or time spent studying versus socializing.
• Trade-offs exist at the societal level, for example between consumer goods and national defense, or efficiency and equity.
• Efficiency refers to the size of the economic pie.
• Equity refers to how fairly the pie is divided.
• Greater emphasis on equity can reduce efficiency, as resources are redistributed from those who earned them.

The Cost of Something Is What You Give Up to Get It

• The cost of something is whatever you give up to obtain it.
• Economists use the term "opportunity cost" to capture the full cost of something.
• Opportunity cost includes dollars, effort, and the next best alternative.
• The opportunity cost of going to class isn't just the time spent in class.
• The cost is what you would have done with that time instead, such as sleeping, playing video games, or spending time with family.
• For purchases, the opportunity cost includes the money spent and the other goods or services you could have bought.
• There is no such thing as a free lunch because there is always an opportunity cost.

People Respond to Incentives

• Incentives drive human behavior.
• Economic incentives involve money or points.
• Social incentives include the desire for acceptance and the avoidance of ridicule.
• Moral incentives derive from one's sense of right and wrong.
• Not everyone responds to the same incentive in the same way.
• Politicians and activists will divide world oil reserves by world annual usage to find X number of years until we run out of oil.
• It is said that we will never run out of oil.
• Eventually, oil will get expensive enough that we will choose something else.

People Think at the Margin

• A marginal change is an incremental adjustment to a plan of action.
• A decision-maker takes an action if and only if the marginal benefit of the action is greater than the marginal cost.
• The marginal benefit is the additional benefit from continuing an activity.
• The marginal cost is the additional cost incurred.
• Using studying as an example, one will continue to study if the additional knowledge gained is greater than the cost of one's next best action (hanging out with friends).
• What matters is the size of the marginal benefit and the marginal cost relative to one another.

Trade Can Make Everyone Better Off

• Trade can make people or countries better off.
• Trade is a positive-sum game
• Voluntary engagement with trade means all parties involved can benefit from it.
• --### Trade and Economic Activity
• Limiting purchases to domestic goods restricts options and necessitates producing more goods independently.
• Reduced trade increases individual production burden.
• Trade enhances overall well-being, while its absence diminishes it.

Free Markets

• Free markets, where sellers operate within legal bounds, are superior at organizing economic activity when compared to planned economies.
• Free markets involve sellers freely selling, and consumers freely buying, within legal boundaries.
• This does not imply unregulated markets; rather, it emphasizes legal compliance for both sellers and buyers.
• Planned economies, like socialism and communism, involve government control over production.

Government Intervention

• Government intervention can improve free-market outcomes, particularly when market failures occur.
• Market failures, such as externalities (where one person's behavior imposes a cost on someone else), can warrant government intervention.
• However, free markets still work better than planned economies

Standard of Living and Economic Principles

• A nation's standard of living is tied to its production of goods that others desire.
• Individual living standards depend on the ability to produce marketable goods and services.
• Printing excessive money leads to inflation.
• There exists a short-run trade-off between inflation and unemployment, requiring policymakers to prioritize one over the other.