Chapter 1-4 BC101 Notes PDF

A production function in economics expresses CHAPTER 4 the relationship between inputs (like labor, Production and Cost capital) and the quantity of output produced....

A production function in economics expresses CHAPTER 4 the relationship between inputs (like labor, Production and Cost capital) and the quantity of output produced. A common form of production function is the Agenda: Cobb-Douglas function, written as: Production and Costs Q = 2. L 0.5 · K 0.5 The production function Short-run and long- Let's assume the function is of the form: run costs Economies of scale Example 1: Let's say a factory uses: Production and Costs Labor (L): 16 units Capital (K): 25 units Introduction: Production and cost analysis are crucial aspects of microeconomics, primarily focusing Now, apply these values to the formula: on how firms and businesses make decisions Q=2 X (16) 0.5 x (25) 0.5 = 2x4x5 = 2x20 = 40 regarding output levels and the efficient allocation of resources. So, the total output Q for 16 units of labor and 25 units These decisions are driven by the relationship of capital is 40 units between inputs (factors of production) and outputs (goods or services produced) while considering the costs incurred in the process. SHORT RUN VS. LONG-RUN PRODUCTION Understanding production and cost functions SHORT RUN helps in assessing firm behavior in both the short run and long run, where different ❖ In the short run, a firm operates with at least constraints affect decision-making. one fixed input, typically capital, which cannot be easily changed. Production refers to the process of creating goods or ❖ This means that while the firm can adjust services variable inputs (like labor or raw materials to Cost refers to the amount of money or resources increase or decrease production, it cannot required to produce. change the amount of fixed input (like machinery or buildings) in the same timeframe. ❖ As a result, the firm faces constraints on its production capacity, leading to diminishing 1. Production Function returns on the variable inputs as they are added. ❖ The production function describes the ❖ In essence, the fixed input limits the firm's technical relationship between inputs and ability to fully respond to changes in demand in outputs, showcasing how different quantities the short run. of input factors, such as labor and capital, Example: contribute to the level of output. Imagine a bakery with 3 ovens (fixed capital) and 2 In a simple form, a production function can be written bakers (labor). If they add more bakers, they can as: produce more bread, but only up to a point. Initially, Q=f(L,K) adding one more baker increases production significantly because the ovens are being used more Where: efficiently. However, as they keep adding bakers, they'll Q is the quantity of output produced, run out of space around the ovens, and bakers will have L represents labor input, and to wait to use the ovens. K represents capital input. This illustrates the Law of Diminishing Returns:  o As more bakers (a variable input) are added These costs are incurred even when production while the number of ovens (fixed capital) stays is zero. the same, each additional baker will contribute less and less to the total production. o Eventually, adding more workers might even Variable Costs (VC): decrease efficiency because they get in each other's way. Variable costs fluctuate with the level of output. o However, in the short run, the bakery is limited Examples include raw materials, energy by fixed capital (number of ovens), so it can't consumption, and wages (for temporary fully optimize production, even if more bakers workers). are hired. Total Cost (TC): Total cost is the sum of fixed and variable costs: TC=FC+VC LONG RUN ❖ In economics, the long run refers to a time period in which all factors of production and costs are variable. This means that firms have enough time to adjust all inputs, including Marginal Cost (MC): capital, labor, and technology, to achieve their Marginal cost is the additional cost incurred desired level of output. when producing one more unit of output. Let us ❖ In the long run, there are no fixed costs, and look at its formula: companies can enter or exit the market freely. Where: MC =ATC AQ In the long run, all inputs can be changed. In our previous example, in the long run, the ATC is the change in total cost, bakery can increase both the number of bakers AQ is the change in quantity (output). (labor) and buy more ovens (capital). This allows the bakery to adjust its scale of Example: production and find the most efficient A bakery produces loaves of bread. The total costs (TC) combination of labor and capital. of producing different quantities of bread are as follows: Producing 50 loaves: Total Cost (TC) = $300 2. Costs of Production Producing 51 loaves: Total Cost (TC) = $305 Cost analysis deals with understanding the To find the Marginal Cost of producing the 51st loaf of expenses associated with production. bread: These costs are divided into two main categories: 𝛥TC= 305-300 = 5 ✓ fixed costs and 𝛥Q= 51-50 = 1 ✓ variable costs. 5 MC= = 5 1 Together, they make up the total cost of production. Answer: The marginal cost of producing the 51st loaf is $5. This means it costs the bakery an additional $5 to Fixed Costs (FC): increase production from 50 to 51 loaves. Firms use marginal cost to decide how much to produce, ensuring Fixed costs are expenses that do not change that producing extra units remains profitable. with the level of output, such as rent, salaries of permanent staff, and machinery depreciation. Marginal Revenue Average cost is the total cost per unit of output. Marginal revenue is the income gained by It can be broken down into two components: selling one additional unit A company sells handmade bracelets. Initially, ✔average fixed cost (AFC) the company is able to sell 50 bracelets at a ✔ average variable cost (AVC). price of 20 each. To increase sales, they decide to lower the price of their bracelets. The sum of these two gives the average total cost (ATC): Price and Quantity Relationship: Average Fixed Cost (AFC): Fixed cost per unit of output At $20 per bracelet, the company sells 50 bracelets. Average Variable Cost (AVC): Variable cost per unit of output At $19 per bracelet, the company can sell 60 bracelets. The formula for Average Total Cost (ATC) is: ATC=AFC + AVC Total Revenue Calculation: Where: Revenue at $20 per bracelet (50 units): 𝐹𝐶 Total Revenue (TR) = Price x Quantity TR $20 x AFC = 𝑄 50 = $1,000. 𝑉𝐶 Revenue at $19 per bracelet (60 units): AVC = 𝑄 TR= $19 x 60 = $1,140. Q is the quantity of output Marginal Revenue (MR): Example: Marginal Revenue is the additional revenue generated by selling one more unit of output. A bakery has the following costs for producing 100 In this case, it refers to the revenue earned by loaves of bread: selling an additional 10 bracelets (from 50 to Fixed Costs (FC): $500 (for rent, equipment, etc.) 60 units). Variable Costs (VC): $200 (for ingredients, labor, etc.) Change in Total Revenue (∆TR) = $1,140 – $1,000 = $140. Step 1: Calculate AFC: Change in Quantity (∆Q) = 60 - 50 = 10. FC 500 Marginal Revenue (MR) = ∆TR / ∆Q= $140 ÷ 10 = $14. 𝐹𝐶 500 AFC = = =5 𝑄 100 Interpretation: The marginal revenue of selling each additional bracelet after lowering the price is $14. This So, the AFC is $5 per loaf. means that for each extra bracelet sold, the company Step 2: Calculate AVC: earns $14 in additional revenue, even though the price per bracelet has dropped from $20 to $19. 𝑉𝐶 200 AVC= =2 𝑄 100 So, the AVC is $2 per loaf. Marginal revenue is the income gained by Step 3: Calculate ATC: selling one additional unit, while marginal cost is the expense incurred for selling that one ATC= AFC + AVC = 5+2=7 unit. Answer: The Average Total Cost (ATC) for producing 100 Each measures the incremental change in peso loaves of bread is $7 per loaf. between varying levels of sales to determine at what level a company is most efficiently This means that on average, it costs the bakery $7 to producing and selling produce each loaf when considering both fixed and variable costs. Average Cost (AC) 3. Economies and Diseconomies of Scale ❖ In the long run, firms can adjust all input levels, leading to potential changes in the cost structure. This gives rise to economies and diseconomies of scale. ❖ Economies of scale occur when an increase in the scale of production leads to a lower cost per unit of output. ❖ This may happen due to factors such as better utilization of resources, specialization of labor, and technological efficiencies. Better utilization of resources: Larger operations may use resources more efficiently. Specialization of labor: As a firm grows, workers can specialize in specific tasks, boosting productivity. (avoid multitasking) Technological efficiencies: Larger firms often invest in advanced technology that lowers production costs. Diseconomies of Scale At a certain point, expanding the scale of production (business expansion) further may lead to inefficiencies, causing the long-run average cost to rise. Diseconomies of scale occur when increasing the scale of production leads to higher costs per unit. This usually happens after a firm has grown beyond its optimal size, resulting in inefficiencies.  Perception CHAPTER 3 Perception is how individuals interpret CONSUMER BEHAVIOR sensory information to understand the world. In marketing, it refers to how consumers view and 1. Utility and preferences interpret products or brands, shaping their attitudes 2. Budget constraints and decisions. Consumers interpret marketing messages, advertisements, and product packaging through their A Comprehensive Overview perceptions. Consumer behavior refers to the study of how This is influenced by past experiences, individuals, groups, or organizations make decisions expectations, and individual biases. regarding the purchase, use, and disposal of goods and services. Example: It encompasses psychological, social, and Two consumers might see the same advertisement for economic factors that influence buying decisions. a smartphone. One may perceive it as innovative and useful, while the other might see it as overpriced and Concepts in Consumer Behavior: unnecessary. Motivation and Needs Perception Learning and Memory Learning and Memory Attitudes and Beliefs Learning influences consumer behavior as Social Influences individuals adapt based on past experiences. There Situational Factors are two learning models: Motivation and Needs Classical conditioning Consumer behavior is driven by needs and motivations. A well-known theory that explains this is associating a product with a positive or Maslow's Hierarchy of Needs, which categorizes needs negative experience into five levels: Operant conditioning (rewards for behavior) ✓ Physiological (basic needs like food and shelter) Loyalty Programs (Positive Reinforcement): ✓ Safety (security and stability)- Savings/ Investments Companies often reward customers with points, discounts, or free items for frequent purchases. ✓ Social (belonging and love), want to be part/connected to the group (Smoking) This encourages consumers to continue ✓ Esteem (status and recognition), Social Status shopping with that company to receive more rewards. ✓ Self-actualization (personal growth), Memory plays a role in recalling brands or personal growth experiences that guide future decisions. Example: Attitudes and Beliefs A consumer buying bottled water is fulfilling a Attitudes are enduring evaluations of products or physiological need, while someone purchasing a brands that shape future behavior. luxury watch is aiming for esteem and social recognition. A consumer's attitude toward a brand can be shaped by beliefs, emotions, and experiences. Example: If a person believes that organic food is healthier, their attitude toward organic brands will likely be positive, influencing their purchasing behavior.  Utility refers to the satisfaction or pleasure that a consumer derives from consuming a good or service. Social Influences It is a measure of how much a product or service Family, friends, culture, social media, and other fulfills a consumer's needs or desires. reference groups impact consumer behavior. People often make purchasing decisions based on societal norms or peer recommendations. Types of Utility 1. Total Utility (TU) Example: 2. Marginal Utility (MU) A person might buy a particular brand of shoes 3. Diminishing Marginal Utility because their friends wear them, or they may be influenced by an influencer on Instagram. Total Utility (TU) Situational Factors Total utility is the overall satisfaction gained from consuming a certain quantity of a good or service. It Context and external conditions, such as physical accumulates as more units are consumed. environment, time, and financial state, affect buying behavior. Example: Example: Eating a slice of pizza provides total utility. Eating more slices increases the total utility, assuming each slice is A consumer might opt for an impulse buy in a retail enjoyed. store when there's a time-limited discount, even if they hadn't planned on purchasing the item. Marginal utility (MU) Understanding consumer behavior helps businesses It is the additional satisfaction gained from consuming tailor their marketing strategies to better meet the one more unit of a good or service. It helps explain needs and desires of their target audience. why consumers make choices and is crucial for understanding demand. By identifying key drivers such as motivation, perception, and social influences, companies can Example: predict buying patterns and influence decision- The marginal utility of a good is the additional making. satisfaction or benefit received from consuming one more unit of that good. For the second slice of pizza, the marginal utility is the extra satisfaction you get 3.2 Utility and Preferences in Consumer from eating it, compared to the first slice. If the Behavior satisfaction decreases, it means the marginal utility of Utility and preferences are central concepts in the second slice is lower than that of the first. understanding consumer behavior and economic theory. Preferences They help explain how consumers make choices among various goods and services based on their Preferences refer to the consumer's subjective tastes perceived satisfaction or value. and desires, which determine their choice between different goods and services. Preferences are influenced by various factors, including personal tastes, cultural influences, and individual experiences. Concepts Related to Preferences Product Pricing Budget Constraint Businesses use the concept of diminishing Utility Maximization marginal utility to set prices and create pricing Consumer Choice strategies. For example: Price discounts might be offered to increase the quantity purchased, leveraging the Utility Maximization diminishing marginal utility of each additional unit. Consumers aim to maximize their utility given their Example: budget constraint. This means they choose the combination of goods that provides the highest level A coffee shop might offer a "buy one get one free" of satisfaction within their financial limits. deal to encourage customers to purchase more coffee, despite the fact that each additional cup may provide Example: less marginal utility. A consumer will allocate their budget to buy a mix of apples and bananas that maximizes their overall satisfaction, considering the prices and their Consumer Segmentation preferences. Preferences help companies segment their market and target different consumer groups. By understanding the different preferences and utilities derived from Consumer Choice various products, businesses can tailor their offerings Consumer choice theory explains how consumers to different segments. make decisions based on their preferences and Example: A car manufacturer might create luxury and budget constraints. It involves choosing the optimal economy models to cater to consumers with different combination of goods and services that maximize preferences and utility levels regarding comfort and utility. price. Example: A consumer might decide to spend their entire budget on a combination of items that provide the greatest FACTORS INFLUENCING BEHAVIOR total satisfaction, given their preferences and the prices. Cultural Factors Culture significantly shapes consumer preferences and purchasing habits. This includes Application of Utility and Preferences traditions, values, and beliefs that are prevalent within Marketing Strategies specific social groups. Cultural influences can vary greatly from one country to another, creating diverse Understanding utility and preferences helps consumer markets. Marketers must understand these businesses create targeted marketing strategies. By influences to cater to target demographics effectively. identifying what consumers value most, companies Example. Food choices, Muslim no pork, Shrimp can design products and promotions that cater to (allergen) their needs and desires. Example: A company that produces health foods might market its products by emphasizing their health benefits, appealing to consumers who value wellness and nutrition. Social Factors Differentiating from competitors can sway decisions in favor of a particular brand. Social influences, such as family, friends, and social networks, significantly impact purchasing decisions. Consumers often rely on recommendations Market Segmentation and reviews from their peers before making selections. Understanding social dynamics helps Market segmentation is the process of businesses align their marketing efforts to engage dividing a broad consumer or business market into potential customers on a personal level. Leveraging smaller, distinct groups (segments) based on shared social proof can enhance trust and brand loyalty. characteristics, such as demographics, behaviors, or needs. Example: based on reviews Personal Factors Individual characteristics including age, Each segment consists of consumers who are income, occupation, and lifestyle play an essential role likely to respond similarly to marketing strategies, in shaping consumer behavior. Each demographic which allows businesses to target specific groups more segment may have different needs and preferences. effectively rather than trying to appeal to an entire For instance, younger consumers tend to favor market. technology-driven products, while older consumers prioritize convenience. Marketers need to segment their audience appropriately to craft targeted Types of Market Segmentation: messages. Demographic Segmentation Dividing the market based on age, gender, CONSUMER DECISION PROCESS income, education, occupation, etc. Problem Recognition Example: A company selling luxury watches may target high-income individuals (income-based The decision-making process begins with segmentation). recognizing a need or problem. This recognition can be triggered by internal factors, such as personal Geographic Segmentation emotions, or external factors, like advertising. Dividing the market based on location, such as Consumers actively seek solutions when a need arises, country, region, city, or climate. driving them to consider different options. Understanding this stage can help businesses position Example: A clothing brand may sell winter coats in their products as ideal solutions. colder regions and lighter clothing in tropical regions. Example: Slow and outdated laptop I solution- buy Psychographic Segmentation new Dividing the market based on lifestyle, values, interests, and attitudes. Example: A health-conscious segment might be targeted by organic food Evaluation of Alternatives brands. Once a problem is recognized, consumers gather information and evaluate available Behavioral Segmentation alternatives. Dividing the market based on consumer They analyze product features, prices, and reviews behaviors, such as purchasing habits, usage before making a final choice. Marketers can influence rate, and loyalty. this stage by providing detailed product information Example: An airline may offer a loyalty program for and highlighting unique benefits. frequent travelers (behavioral segmentation based on purchase frequency. Trends in Consumer Behavior Emerging Trends Recent trends indicate a significant rise in online shopping and the demand for personalized experiences. Consumers prioritize convenience and fast delivery options, pushing retailers to adapt their operations accordingly. Sustainability also plays a critical role, with more shoppers seeking eco-friendly products. Brands that align with these trends can foster stronger connections with their audience. DATA INSIGHTS 45% - Online Purchases 30% - Brand Loyalty 15% - Eco-conscious Shoppers 10% - Impulse Buyers CHAPTER 2 CETERIS PARIBUS Agenda: The term ceteris paribus is a Latin phrase meaning "all other things being equal" or Demand and Supply "holding other factors constant." Demand: determinants, elasticity, and shifts Supply: determinants, elasticity, and shifts In the context of the law of demand, it is used to Market equilibrium and the effects of shifts in isolate the relationship between the price of a good demand and supply and the quantity demanded. Ceteris paribus means this relationship holds true only if all other factors (such as the prices of other fruits, consumers' income, Introduction to Supply and Demand etc.) remain unchanged. DEFINITION OF DEMAND ❖ Demand refers to how much (quantity) of a DEFINITION OF SUPPLY product or service is desired by buyers. The law of supply states that, all else being equal, ❖ The quantity demanded is the amount of a an increase in the price of a good or service leads to product people are willing to buy at a certain an increase in the quantity supplied of that good or price. service, and a decrease in the price leads to a ❖ But It is not just about the want for the decrease in the quantity supplied. product but also the ability and willingness to pay for it. In other words, producers are more willing to offer more of a product for sale at higher prices and less willing to offer as much at lower prices. This Introduction to Supply and Demand relationship typically results in an upward- sloping supply curve on a graph where price is plotted on the The law of demand is a fundamental principle vertical axis and quantity supplied on the horizontal in economics that states that, all else being equal, as axis. the price of a good or service decreases, the quantity demanded of that good or service increases, and conversely, as the price increases, the quantity MARKET EQUILIBRIUM demanded decreases. Equilibrium is the point where supply equals This inverse relationship between price and demand for a product. At this point, the allocation of quantity demanded is driven by the idea that goods is at its most efficient because the amount of consumers are generally willing to purchase more of a goods being supplied is exactly the same as the good when it is cheaper and less when it is more amount of goods being demanded. expensive. Equilibrium is when the quantity of a product that suppliers want to sell matches the quantity that Law of Demand: When the price of a product consumers want to buy. decreases, the quantity demanded generally increases, and vice versa. Price Decrease: When the price of a good or service falls, it becomes more affordable to more people, so they are likely to buy more of it. Price Increase: When the price of the good or service rises, it becomes less affordable, so fewer people are likely to buy it, resulting in a decrease in quantity demanded.  Understanding Demand: Determinants, Elasticity of Demand Elasticity, and Shifts Elasticity of demand measures how much the quantity demanded of a good responds to a change in price. It can be classified into: DETERMINANTS are factors that can lead to a change in the quantity demanded of a good or service. 1. Price Elasticity of Demand (PED): Elastic Demand: When the percentage change in quantity demanded is greater than the percentage Determinants of Demand change in price (PED > 1). For example, luxury items Income often have elastic demand. Prices of Related Goods (Substitute) Inelastic Demand: When the percentage change in Taste and Preferences quantity demanded is less than the percentage change in price (PED < 1). For example, essential medications often have inelastic demand. Demand Determinant- Income Price of the Good 2. Factors Affecting Elasticity: Law of Demand: As the price of a good falls, the quantity demanded generally rises, and vice versa. Substitutability: Goods with many substitutes tend to have more elastic demand. Determinants-Income Necessity vs. Luxury: Necessities tend to have inelastic Normal Goods: demand, while luxuries tend to have elastic demand. ✓ As consumer income increases, demand for Proportion of Income: Goods that take up a large normal goods increases. proportion of income tend to have more elastic Inferior Goods: demand. ✓ As consumer income increases, demand for inferior goods decreases Shifts in Demand Shifts in demand occur when there is a change in one Determinants of Demand-Prices of Related Goods of the determinants of demand, causing the entire demand curve to move. Substitutes Increase in Demand: If the price of a substitute good (e.g., tea for coffee) rises, the demand for the original good (e.g., Example: If there is a sudden trend that makes a coffee) may increase. Complements particular brand of sneakers highly fashionable, the demand for those sneakers will increase. This causes If the price of a complementary good (e.g., the demand curve to shift to the right. printers for computers) rises, the demand for the original good (e.g., computers) may decrease. Decrease in Demand: Example: If a new health report reveals that a specific type of snack is unhealthy, the demand for that snack Determinants of Demand- Taste and Preferences may decrease. This causes the demand curve to shift Changes in consumer preferences can shift to the left. demand. For example, if a new study highlights the health benefits of avocados, demand for avocados might increase. Common causes include: Managerial inefficiencies Communication problems Overcrowding of resources Managerial inefficiencies As firms grow, it becomes harder to manage all departments and employees effectively. Decision-making may slow down, and communication can break down, leading to mismanagement. Communication problems In large firms, information may not flow efficiently between departments or levels of management, leading to errors or delays. Overcrowding of resources As a firm tries to produce more, its resources (e.g., machines, space, and employees) can become overstrained, reducing productivity and increasing costs.  They may use different pricing strategies CHAPTER 1 such as cost-plus pricing, competitive Agenda: pricing, or value-based pricing to optimize their revenue and market position ✓ Definition and scope of microeconomics ✓ The economic problem: scarcity and choice Use of Resources ✓ Opportunity cost Firms allocate resources like labor and TOPIC 1 capital to maximize their production Introduction to Microeconomics efficiency. This includes decisions on how many Microeconomics is a branch of economies workers to hire, how much machinery to that focuses on the behavior of individual invest in, and how to organize production consumers, firms, and markets. processes. It examines how these economic agents Efficient resource use helps in minimizing make decisions about the allocation of costs and maximizing output. limited resources, and how these decisions influence the supply and demand for goods and services in specific Cost-plus-pricing markets. Cost-plus pricing is a pricing strategy Key Concepts where a business determines the cost of Microeconomics is indeed a branch of producing a product or service and then economics that focuses on understanding the adds a percentage or fixed amount to that decision-making processes of individual economic cost to set the final price. agents, including consumers, firms, and markets. This approach ensures that the business covers its costs and earns a profit. Consumers Here's a simple formula for cost-plus pricing: Microeconomics analyzes how individuals make choices about what to buy given their limited income. Selling Price-Cost of Production + Markup This involves understanding concepts like The markup can be a percentage of utility, which measures the satisfaction or the cost or a fred amount. happiness a consumer gets from consuming goods and services. Example: A consumer deciding whether to spend Competitive pricing their money on a new phone or a vacation. Competitive pricing is a strategy where a Microeconomics would study how they business sets its prices based on the prices weigh the utility of each option against charged by its competitors. their budget constraints. The goal is to offer prices that are attractive relative to what other businesses are charging for similar Pricing of Goods products or services. This approach can help a company stay Firms decide on the price of their goods competitive in the market and attract based on production costs, competition, customers who are price-sensitive. and desired profit margins.  Value-based pricing II. Monopoly: Value-based pricing is a strategy where A market structure where a single a business sets prices based on the seller dominates the market with no perceived value of a product or service close substitutes for the product. to the customer, rather than on the This seller controls the price and cost of production or competitor supply of the product. pricing. This approach focuses on what III. Oligopoly customers are willing to pay based on the benefits and value they receive, A market structure where a few large rather than the costs incurred by the firms dominate the market. business. These firms have some control over prices and often compete on factors other than price, such as quality or Markets marketing. Microeconomics examines how prices are determined in different types of markets (e.g., competitive markets, monopolies). IV. Monopolistic Competition It also looks at how prices affect the quantity of goods supplied and A market structure where many firms sell demanded. similar but not identical products. Each firm has some control over its prices Example: In a competitive market for coffee if the due to product differentiation, and there demand increases, the price of coffee beans may is competition among firms. rise, leading farmers to increase their supply to meet the demand. V. Duopoly A special case of oligopoly where only two Market structures/Types firms dominate the market. Markets can be categorized in various These firms have significant control over ways based on factors such as the nature prices and often engage in competitive of competition, the type of goods or strategies against each other. services traded, and the geographical scope. VI. Black Market Here are some common types of markets: An informal market where goods or services are traded illegally or outside of I. Perfect Competition government regulations. This often includes goods that are banned A market structure where there are many or heavily regulated. buyers and sellers, all offering identical products. Prices are determined by supply and demand, and no single seller can influence the market price. TOPIC 2 This is a trade-off between different types of goods and services. ✓ The economic problem: scarcity and choice ❖ Production Choices The economic problem of scarcity and It involves decisions made by businesses choice is a fundamental concept in about how to allocate their resources to economics. produce goods and services. It arises because resources are limited, These choices determine what to produce, while human wants and needs are how to produce it, and in what quantities. virtually unlimited. This situation forces individuals, Example: A car manufacturer might have to businesses, and governments to make choose between producing more electric vehicles choices about how to allocate resources or more gasoline-powered cars. The choice most effectively. depends on factors like consumer demand, production costs, and environmental regulations. SCARCITY ❖ Government Choices Scarcity refers to the limited nature of resources. It involves decisions made by public These resources include time, money, authorities on how to allocate resources, labor, land, and raw materials. implement policies, and address various Since these resources are finite, it is societal needs and challenges. impossible to produce enough goods and These decisions impact the economy, services to satisfy all human wants. public welfare, and overall quality of life. This creates a need to prioritize and make decisions on how to best use these limited Example: Governments face the challenge of resources. allocating limited tax revenues, they must choose between funding healthcare, education, defense, or infrastructure. CHOICES ❖ Consumer Choice OPPORTUNITY COST It refers to the decisions individuals make Opportunity Cost refers to the value the regarding how to spend their limited next best alternative that is forgone when resources (like money) on various goods a choice is made. and services. In other words, it's what you give up in It reflects how consumers prioritize their order to pursue a certain action or needs and wants given their budget decision. constraints. It's a fundamental concept in economics because it highlights the cost of choosing Example: A person has a limited amount of one option over another. money to spend. If they decide to buy a new smartphone, they may have to forgo a vacation.