- Scarcity
forces us to make choices. Choices entail an alternative foregone
or given up -- the opportunity cost. Economists assume that human
beings make choices in a rational manner, that is, they weigh the
marginal costs and marginal benefits of that alternative. Economics
focuses on the analysis of this decision-making process. It helps
us understand how people behave (make choices,) in the context of
scarcity.
- Scarcity
is the most fundamental problem in economics. Scarcity exists because
human wants and needs exceed the quantity of goods and services that
can be produced using all available resources. Economists are fond
of saying that "there is no free lunch," which means that,
even if something is "free" to us, there is a cost to society
in terms of the alternative foregone. For example, if a city uses
land to build a football stadium, the best alternative for that land
is given up. If additional funds are spent for police patrols, less
money is available to hire more teachers.
The reality is that cannot have everything that we want. So, faced
with scarcity, individuals, government and society in general must
make choices. Students make choices every day. Is watching TV the
best use of your time? Is working at a fast-food restaurant better
than the best alternative job or some other use of your time?
Whenever a choice is made, something is given up. The opportunity
cost of a choice is the best alternative given up. Choices involve
trading off the expected value of one opportunity against the expected
value of its best alternative. The evaluation of choices and opportunity
costs is subjective; such evaluations differ across individuals and
societies.
- To
make efficient decisions - decisions that provide the greatest possible
return from the resources available -, people and society must weigh
the benefits and costs of using their resources to do more of some
things, and less of others. For example, to use their time effectively,
students must weigh the additional benefits and costs of studying
economics rather than listening to music or socializing with friends,
or sleeping. School officials must decide whether to use some of its
funds to buy more library books, more football helmets for the team,
or more classroom equipment for teachers. Company managers must choose
which products to make and whether to increase or decrease their output.
Government officials must decide which spending programs to increase
and which to decrease.
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