Unit 1.1: Scarcity, choice and opportunity cost
This page looks further at the question of what is economics and given that we do not live in a perfect world, we are forced to make choices in terms of how we spend our scarce financial resources as well as how we spend our time.
What is scarcity and why does it exist? Why does the scarcity of a good or service depend as much on location and circumstance as the product in question? What is the basic economic question?
Lesson time: 120 minutes
To develop an understanding of the concept of scarcity and why does economics depend on scarcity? Developing an understanding of the relationship between scarcity and opportunity cost and how in any society the market place is the medium by which sellers and consumers meet.
1. Beginning activity - start with the opening video on scarcity before having your class complete the beginning activity which asks students to record their current purchases, as well as those purchases they would make if their budget / allowances allowed them to buy more goods and services. Guide the students through the task and link their choices to opportunity cost. (15 minutes)
2. Physical process - students should then read the class handout, which includes key terms and activities. Make the point that the scarcity of any good depends on the situation and place as well as the actual good or service in question. For instance sand can be a free good in the desert but an economic good in an urban environment. Activity 2 illustrates this well so spend some time discussing the two photographs, showing an entrepeneur making money by selling 'air'. emphasize the point that the entrepreneur is selling air (15 minutes)
3. Discussion activity - on economic and free goods. (10 minutes)
4. Beautiful market places activity - show the slideshow entitled beautiful market places and contrast the way that market places are set up in wealthy nations such as France and Netherlands and those from the developing world. (15 minutes)
5. Class exercise on opportunity cost, taken from the red pill, blue pill moment in the film Matrix. (15 minutes)
6. Final video activity linking the concepts of markets to the film Star wars. (10 minutes)
7. Assessment - students can then complete the activity on scarcity, either as a class or homework exercise. The aim being to decide who lives and who dies based on the merits of each patient. (30 minutes)
The basic economic question - defined as limited resources and unlimited wants.
Opportunity cost - the cost or value of an economic decision in terms of the next best option foregone.
Free goods - goods which are unlimited in supply have no opportunity cost. Examples might include fresh air, sea water in coastal areas or sand in the desert. These goods have no economic value and at zero cost are still limitless.
Economic goods - all goods which have a value, derived from the fact that they are limited in supply. This might also apply to goods such as fresh air in certain over polluted cities or sand in an urban, non desert environment.
Market place - any physical or online location where consumers and suppliers meet, to exchange their goods and services.
Watch the following short video which explains the concept of scarcity and then complete the activity that follows:
As IB students you are examples of consumers who either consciously or otherwise make economic decisions everyday - how to spend your scarce resources. You will have a different name for scarce resources - perhaps you call it a monthly allowance, money from your parents, wages from your part time job e.t.c. Start by writing down a list of the purchases that you regularly make. Now complete this exercise by writing down a list of those goods and services which you would like to consume if your monthly budget were significantly larger. What about those goods and services which you choose not to purchase if your monthly allowance was reduced? Without knowing you are making a consumption decision based on the relative opportunity costs of your purchases.
(a) The photograph illustrates illustrates an economic good from Zhengzhou city, Henan province. A heavily polluted city in China where some of the residents are hooked up to oxygen masks so they can breathe in some fresh air as the country's pollution hits crisis levels. Why is fresh air a free good in some locations but an economic good in others.
In economics we make a distinction between a small number of ‘free’ goods which are limitless and which have no economic value. As soon as they become limited, therefore, then those same goods have a value. This is why cities with highly polluted air in some Asian countries see fresh air sold in ‘oxygen cafes’ – sometimes for considerable prices.
(b) The basic economic problem can be summarised as unlimited wants / needs but limited resources to purchase them. Why does this mean that all purchases of economic goods comes at an opportunity cost?
Given that most people have limited incomes they must make choices in how they spend their income. Every decision that a consumer makes comes at a cost, as each item purchased reduces the disposable income that a consumer has to purchase other goods and services. This is called opportunity cost – the next best available option foregone.
(c) What is the role of markets in modern society?
Given that any society consists of suppliers / producers wishing to sell their goods and services, as well as consumers wishing to purchase them, any society must therefore contain a medium for enabling the necessary trade to take place. This is called a market place.
Class notes available at: Scarcity notes
3. Discussion on scarcity
Why is it that in some parts of the world goods such as sand or water are free goods while in other areas those same goods become economic goods and can be sold openly in the market place?
Again the response comes down to scarcity. In parts of the world where those goods are effectively limitless they are free goods, having no commercial value while in others the scarcity of those goods makes it possible to package the good and sell it. The same applies to the packaging and sale of fresh air in the polluted cities of China. Unlike most parts of the world in some cities fresh air is limited in supply and can be sold.
Activity 4: Beautiful marketplaces
Your teacher will show you the following presentation which contains beautiful images of marketplaces. Then answer the following question, do these pictures of different market places provide any clues as to the business environments where they came from?
When I show the images of the different market places to my own classes the most common statement which I hear is the difference between those from European / western economies such as Barcelona, Amsterdam e.t.c. and those from nations in Asia and the middle east. The European market places seem cleaner, more organised, perhaps more sterile even in the way that the products are organised. For example when I observe the cheese market in the Netherlands the formation and even spacing suggests that the products have been transported by some form of mechanised transport, rather than carried by hand.
5. Class exercise on opportunity cost
You are given $ 100 by your parents to spend on goods and services. List the things that you would like to buy in order of priority as well as the approximate price of purchasing those goods or services. Which goods and services will you purchase and which will you forego? Those items represent the opportunity cost of your initial purchases.
Remember that the opportunity cost will always be the second best option that you gave up. So if you are undecided as to how to spend your $ 100 and you have a choice between going on holiday with your friends and spending the money on clothes then the one that you choose to forego is the opportunity cost. If you choose the holiday then your opportunity cost is the clothes that you can now longer purchase.
This was an easy question, now for the real life blue pill question. Suppose your favourite college costs your parents $ 30,000 to complete and you are offered the course or the cash to start a business, which option would you select?
How would you spend the $ 30,000
Responses should include current versus future earnings as well as the alternative life decisions you could make. Remember that statistically 80% of new businesses fail, where as if you work hard you should achieve your IB.
Further reading on this topic can be found at: University article
Activity 6: Links to economics activity in Starwars
Watch the following short video and then decide what other connections can we make between economics and the Star wars trilogy.
Activity 7: Scarcity within the local hospital
A small town has one hospital and in this hospital there is just one radiology machine. This is used to treat patients diagnosed with Leukaemia and without this treatment the patient would quickly die. Typically treatment lasts one year, after which the majority will no longer require treatment and be able to return to work. The one radiology machine can run for 30 hours per week and under the current budget cycle there are insufficient funds to purchase another. As the manager of the hospital, you must decide who gets the treatment and who misses out. The treatment is successful in 99% of cases. The list of patients requiring treatment is as follows:
Patient A: 6 year old child, has three brothers and sisters, requires treatment 3 hours per week.
Patient B: 32 years old female university lecturer, married with no children, 4 hours per week.
Patient C: 6 year old child who needs 10 hours per week.
Patient D: A 3 year old child with a more aggressive strain of the cancer. She currently needs 4 hours per week but may require treatment for an indefinite period due to the severity of her condition.
Patient E: 8 year old child, no brothers and sisters, 5 hours per week.
Patient F: 30 year old female entrepreneur, two young children, 6 hours per week.
Patient G: 30 year old male engineer with two young children, 5 hours per week.
Patient H: 76 year old female, 2 hours per week.
Patient I: A 50 year old man who needs 5 hours per week. He is married with grown up children and currently working.
Patient J: 45 year old man with no children, working in a local restaurant. Requires just 2 hours per week for just 6 months.
Patient K: A very wealthy 66 year old man who requires 10 hours per week but has agreed to purchase the hospital a second radiology machine if he is still alive in one year’s time.
Decide how you will allocate the 30 hours, in order of preference.
Who to save and who to deny treatment to is a difficult one, you are all economics students but also humans as well? As a human you may be very reluctant to deny treatment to an 8 year old child? As an economist though, does it might make sense? After all an 8 year old child is not currently economically active and as an economist you may decide to sacrifice the child for more economically productive patients. Patient K is also a tricky one, saving this wealthy individual means sacrificing one third of all your radiology time this year, but comes with the promise of a new machine purchase the following one.