Scarcity Opportunity Cost Specialization Trade Lecture Note Set 2 Scarcity Economic Cost SCARCITY the reason for economy A resource or a commodity is scarce if at a price of zero the total quantity demanded exceeds the total quantity supplied If a commodity is scarce then its market price will be positive A commodity is not scarce only if its market price is zero or negative Scarcity Economic Cost Resources are scarce Scarcity Economic Cost Resources are scarce You rationally choose your use of a scarce resource Scarcity Economic Cost Resources are scarce You rationally choose your use of a scarce resource But at the cost of giving up your next most preferred use of that resource Scarcity Economic Cost Resources are scarce You rationally choose your use of a scarce resource But at the cost of giving up your next most preferred use of that resource That is the opportunity cost of your rational choice Scarcity Economic Cost E g an acre of land can be used either for growing wheat and for grazing cattle but not both If you graze cattle then you forgo If you grow wheat then you forgo Scarcity Economic Cost E g an acre of land can be used either for growing wheat and for grazing cattle but not both If you graze cattle then you forgo the value of growing wheat If you grow wheat then you forgo Scarcity Economic Cost E g an acre of land can be used either for growing wheat and for grazing cattle but not both If you graze cattle then you forgo the value of growing wheat If you grow wheat then you forgo the value of grazing cattle Scarcity Economic Cost The value of grazing cattle is 1 200 The value of growing wheat is 1 000 The opportunity cost of grazing cattle is The opportunity cost of growing wheat is Scarcity Economic Cost The value of grazing cattle is 1 200 The value of growing wheat is 1 000 The opportunity cost of grazing cattle is 1 000 The opportunity cost of growing wheat is Scarcity Economic Cost The value of grazing cattle is 1 200 The value of growing wheat is 1 000 The opportunity cost of grazing cattle is 1 000 The opportunity cost of growing wheat is 1 200 Scarcity Economic Cost The value of grazing cattle is 1 200 The value of growing wheat is 1 000 The opp cost of grazing cattle is 1 000 The opp cost of growing wheat is 1 200 Which is the least costly choice Which is the value maximizing choice Scarcity Economic Cost The value of grazing cattle is 1 200 The value of growing wheat is 1 000 The opp cost of grazing cattle is 1 000 The opp cost of growing wheat is 1 200 Which is the least costly choice Grazing cattle Which is the value maximizing choice Scarcity Economic Cost The value of grazing cattle is 1 200 The value of growing wheat is 1 000 The opp cost of grazing cattle is 1 000 The opp cost of growing wheat is 1 200 Which is the least costly choice Grazing cattle Which is the value maximizing choice Grazing cattle Scarcity Economic Cost Why is the value maximizing choice also the least costly choice Scarcity Economic Cost Why is the value maximizing choice also the least costly choice When you select the higher value choice you give up the lower value choice Opportunity cost is the only concept of cost relevant in economics Exercises on Opportunity Costs You are invited to a one hour lunch Your host pays Is the lunch costless to you Exercises on Opportunity Costs You are invited to a one hour lunch Your host pays Is the lunch costless to you No Your scarce hour had valuable alternative uses that you have forgone Exercises on Opportunity Costs Exercises on Opportunity Costs Chosen Value to Task Robbie Make the 4 bed Do the 7 laundry Spray the 13 dog Watch the 11 movie Robbie s Opp Cost 13 Exercises on Opportunity Costs Chosen Value to Task Robbie Make the 4 bed Do the 7 laundry Spray the 13 dog Watch the 11 movie Robbie s Opp Cost 13 13 Exercises on Opportunity Costs Chosen Value to Task Robbie Make the 4 bed Do the 7 laundry Spray the 13 dog Watch the 11 movie Robbie s Opp Cost 13 13 11 Exercises on Opportunity Costs Chosen Value to Task Robbie Make the 4 bed Do the 7 laundry Spray the 13 dog Watch the 11 movie Robbie s Opp Cost 13 13 11 13 Exercises on Opportunity Costs Which task is most valuable to Robbie Which task is Robbie s rational choice Which task is least costly to Robbie Exercises on Opportunity Costs Which task is most valuable to Robbie Spraying the dog Which task is Robbie s rational choice Which task is least costly to Robbie Exercises on Opportunity Costs Which task is most valuable to Robbie Spraying the dog Which task is Robbie s rational choice Spraying the dog Which task is least costly to Robbie Exercises on Opportunity Costs Which task is most valuable to Robbie Spraying the dog Which task is Robbie s rational choice Spraying the dog Which task is least costly to Robbie Spraying the dog Exercises on Opportunity Costs Which task is most valuable to Robbie Spraying the dog Which task is Robbie s rational choice Spraying the dog Which task is least costly to Robbie Spraying the dog The rational choice and the least costly choice are the same Why Exercises on Opportunity Costs The rational choice and the least costly choice are the same Why The rational choice provides the highest value and forgoes the second highest value Any other choice forgoes the highest value and so is more costly Economic Profit The economic profit of a particular use for a scarce resource unit is the accounting profit of that choice less the opportunity cost of that choice Economic Profit The economic profit of a particular use for a scarce resource unit is the accounting profit of that choice less the opportunity cost of that choice E g the economic profit of growing wheat on the acre of land is Economic Profit The economic profit of a particular use for a scarce resource unit is the accounting profit of that choice less the opportunity cost of that choice E g the economic profit of growing wheat on the acre of land is 1 000 1 200 200 Economic Profit The economic profit of a particular use for a scarce resource unit is the accounting profit of that choice less the opportunity cost of that choice E g the economic profit of growing wheat on the acre of land is 1 000 1 200 200 What is the implication of a negative economic profit Economic Profit What is the implication of a negative economic profit That you have an alternative with a higher profit than the choice you selected You re fired Economic Profit Positive economic profit induces ENTRY into an industry Negative