"Economics is everywhere, and understanding economics can help you make better decisions and lead a happier life."

– Tyler Cowen

 

Overview:

We live in a world where our resources are limited compared to our wants. Because we are faced with the fundamental economic problem of scarcity, we have to make choices that involve tradeoffs. This series of lessons provides an introduction to the basic economic concepts of scarcity, choice, decisions made at the margin, and opportunity cost. Economic thinking provides a set of tools that helps you make better decisions and enables you to better understand the choices of others. Entrepreneurs who use these critical thinking tools are in a position to make better choices about their business.

Concepts and Terms:

·        Benefits

·        Choice

·        Cost

o    Transaction Costs

o    Opportunity Costs

·        Decisions at the Margin

·        Marginal Utility

o    Marginal Cost

o    Marginal Benefit

 

 

 

·        Scarcity

·        Subjective Value

·        Sunk Costs

·        Tradeoffs

·        Value 

 

Objectives:

Students will be able to…

·        Define scarcity and opportunity cost

·        Recognize that individuals face the problem of scarcity in deciding how to allocate their resources, including their time

·        Identify that all economic choices involve tradeoffs and explain the opportunity cost associated with a given choice

·        Explain what it means that decisions are made at the margin

·        Demonstrate the ability to identify the anticipated costs and benefits of alternatives when making decisions

 

Related Standards:

Standard 1: Scarcity – Productive resources are limited. Therefore, people cannot have all the goods and services they want; as a result, they must choose some things and give up others.

Standard 2: Decision Making – Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Many choices involve doing a little more or a little less of something: few choices are “all or nothing” decisions.

Standard 3: Allocation – Different methods can be used to allocate goods and services. People acting individually or collectively must choose which methods to use to allocate different kinds of goods and services.

 

Lesson 1 – Scarcity, Choice, and Tradeoffs

 

Description:

Scarcity exists because we have limited resources to satisfy an unlimited number of wants and needs, with time being our most scarce resource. Every decision and choice we make involves tradeoffs.

In this lesson, students will read a brief description of the fundamental economic problem of scarcity. Next, students will watch a humorous video about the tradeoffs involved with difficult decisions. Finally, in a brief activity, students will make choices about their business based on the expected costs and expected benefits.  This activity builds on the business idea they selected in the Activity 1.3.B - Serving Others in Your Community. 

 

Time Required: 

45 min

 

Required Materials:

Internet connection, writing instrument 

Whiteboard (or poster board) to record values

 

Prerequisites:

Module 1 – What is Entrepreneurship?

3.1.A – Read and discuss the following article using the questions below to guide your discussion [20 min]:

Article:  Scarcity by Russell Shannon (FEE.org)

"Scarcity comprises two integral and conflicting aspects—unlimited human wants and limited resources…We cannot satisfy all our desires. We all are always forced to choose. That’s why we call economics ‘dismal.’ What should we choose? How should we go about making choices? First we must understand the underlying essence of scarcity."

Discussion Questions:  Scarcity

1.  Why do individuals have to make choices?

a.      We live in a world of limited resources that have alternative uses. Our wants and needs are virtually unlimited.

b.      The existence of scarcity means that we have to make choices because not all of our desires can be satisfied at the same time.

 

2.  Will it ever become possible for society to become so wealthy that we no longer face the problem of scarcity?

a.      No. Scarcity exists because human wants exceed what can be made from the available resources at any given point in time. We can better use our resources to become wealthier and raise our standards of living, but it is not possible for humans to eliminate the problem of scarcity. 

b.      Professor Shannon explains, “…scarcity is a pervasive, universal problem that no one can duck. Just like air, scarcity is everywhere…. We cannot satisfy all our desires. We all are always forced to choose.”

c.      Even if we had an infinite abundance of material resources, our time is still a scarce resource and we will still face the problem of scarcity.

 

3.  All economic questions arise from the problem of scarcity. We must make choices about how to allocate those resources. But, the important question is, who should choose?  Should individuals make choices for themselves or should we have a centralized coordinating committee to make important economic choices?

a.      Scarcity requires that people must make choices about using resources to satisfy wants. As we learned in Lesson 2.1, value is in the eye of the beholder. Another way to say this is that economic value is subjective. People’s wants and needs are very different and constantly changing.

b.      Professor Shannon explains, “Surely a committee could not comprehend the vast variety of human wants. It would inevitably ignore individual idiosyncrasies.”

c.      Countries that employ more centralized decision making tend to have lower standards of living and fewer opportunities.

d.      A market where individuals are left free to pursue their own choices is the “social mechanism most conducive to the development of man’s abilities and resources.”

e.      “Allowing for free and open competition seems to be both a surer and a safer way to satisfy the diverse wants of man.”

 

3.1.B – Watch and discuss the following video about choices and tradeoffs using the questions below to guide your discussion [5 min]:

Video:

(Absa Bank, 1:58 min)

This popular test challenges several children by asking them to make a choice between eating a marshmallow now or delaying their gratification and receiving an additional marshmallow for their patience. This video is an entertaining illustration of the tradeoffs that come with the choices we make.

Discussion Questions: Marshmallow Test

1.  Use the economic concepts of scarcity, value, choice, and tradeoff to explain the Marshmallow Test video.

a.      Scarcity is the fundamental economic problem of having unlimited wants in a world of limited resources. In this video the children were given one marshmallow, but judging from their reactions, it seems they all struggled with the self-discipline necessary to delay their gratification.

b.      Scarcity forces us to choose among alternatives.  In the video, the children were made to choose between one marshmallow now or two marshmallows later.

c.      Value is subjective. Some people may prefer one marshmallow now and avoid the discomfort of having to wait. Other people may prefer waiting in order to get two marshmallows. People make choices based on what they believe to be the expected costs and benefits of the alternatives.

d.      All choices involve comparing the expected value of one opportunity against the expected value of the alternative.

e.      All choices have a cost. You can’t have your marshmallow and eat it too!

 

3.1.C – Complete the following activity and share your ideas with the group [20 min]:

Activity: Making Decisions When Planning Your Business

We live in a world of scarce resources that have alternative uses. This scarcity necessitates that we make choices. Our desires cannot all be satisfied at once, and we have to make choices based on the expected costs and expected benefits between available alternatives.

For this activity, select a business you think you might like to start. If needed, go back to your list of business ideas you identified in Activity 1.3.B - Serving Others in Your Community.

There are many decisions that must be made when starting a business, and your money and time are both limited. Consider the tradeoffs and complete the following two tables with how you plan to allocate your money and time.

1. Imagine you have $100 to start your business. How will you choose to allocate your money between various business expenses? You may choose from the following list or use your own:

·       Marketing

·       Advertising

·       Materials/Supplies

·       Equipment

·       Office Space

·       Phone/Internet Access

·       Licenses

·       Inventory

·       Insurance

·       Hire Website Designer

·       Manufacturing

·       Distribution

·       Hire a salesperson 

Business Expense	$ Amount
	$100

 

B) Imagine you have 10 hours each week to work on your business. How will you choose to allocate your time? Remember, you can do things yourself or hire people to help you.  Below are some examples or you may choose your own:

·       Market Research

·       Create Website

·       Make Products or Goods to Sell

·       Distribution

·       Sales

·       Print Materials

·       Resume Research/Hire Employees

·       Apply for licenses

·       Networking

·       Marketing/Advertising

·       Attend Classes

·       Learn Professional Skills