BEC - Scarcity, Trade-offs, and Opportunity Costs Lesson
Scarcity, Trade-offs, and Opportunity Costs Lesson
Scarcity and Choice Video
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The central problem the field of economics addresses is the concept of scarcity. Scarcity is more than a shortage of an item. It is a lack of available resources to meet the unlimited wants and needs of individuals. When we speak of the scarcity of resources, it is important to identify the various types of resources. Resources, or the factors of production, are broken down into four basic categories.
Factors of Production
Land: Land is considered to be the natural resources provided by the Earth. So it includes actual land, trees, lakes, mineral deposits, etc.
Labor: Labor, simply put, is the work performed by people with all their skills and abilities.
Capital: Capital references the machines, tools, and factories used to produce other goods and services. It is important to note that capital does not include money. When we want to refer to money, we term it as "financial capital."
Entrepreneurial Ability: The entrepreneur is the factor of production that is responsible for coordinating the other factors of production to create goods and services. Oftentimes, the entrepreneur is considered a risk-taking individual (because he or she has developed a new product that may or may not be successful) in search of profit.
Scarcity of these resources implies that choices must be made between alternatives. We can't have everything we want or need; therefore, we must decide what we need the most. Our alternatives are commonly referred to as trade-offs. For example, a student may have one hour of free time that can be spent either hanging out with friends or watching TV. After weighing the pros and cons of each alternative, the student chooses to spend time with friends. This decision between trade-offs results in an opportunity cost. A cost is something that is given up. In this case, what was lost or given up? The opportunity cost was the enjoyment the student would have gained from watching TV.
The concepts of scarcity, trade-offs, and opportunity cost apply to individuals, businesses, and nations. No one is exempt. Therefore, careful consideration of how to allocate these resources must be made in order to maximize the benefits received by societies. That is to say, rational decision-making must prevail. To make rational decisions, economists "think on the margin." This is termed as marginal analysis. The word marginal means extra or additional. There will be a marginal benefit (extra benefits) and a marginal cost (extra cost) to every decision (for example, a change in consumption or a change in production). So long as the marginal benefit (MB) is greater than the marginal cost (MC), it is wise to partake in a particular activity.
Positive vs. Normative Video
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When evaluating economic decisions, economists must differentiate between positive statements and normative statements. Positive statements are statements of fact or a statement of "what is." They can be proven. There can be no argument as to their validity. An example of a positive statement is "milk is $3.85 per gallon." Normative statements are opinion-based or a statement of "what should be." They cannot be proven and can typically be argued for and against. An example of a normative statement is "the price of milk is a bigger issue than the price of gasoline."
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