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1.2: Scarcity and Choices

  • Page ID
    210820
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    If there are no free choices, what then forces people to do something that will exact a cost?

    Scarcity

    Scarcity is the lack of enough resources to satisfy all desired uses of those resources.

    Scarcity of time, money, or resources creates a situation where one cannot do everything, he/she desires. They are forced to choose something over another.

    The cost of every choice we make is based on the value of what we must give up.

    Example \(\PageIndex{1}\)

    You have only one choice from three options:

    A black line drawing of a person with arrowsDescription automatically generated

    Let’s say you choose option B.

    Question: What is the cost of your decision?

    A?

    C?

    A+C?

    Solution

    Since you can choose only one option, it does not make sense that the cost of your choice is the value of both A and C. If you could not choose B then you would have to choose between A or C. Therefore, the cost of your choice is the value of your most favored second option.

    Opportunity Costs

    Opportunity cost is the most desired goods or services that are forgone in order to obtain something else.

    It is what is given up for getting something else. This is how economists refer to the costs incurred from decision making.

    To give you an idea of how the concept of opportunity cost is used, here is a quote from the August 7th, 2008, issue of the Economist. The article discusses the consequences of seeking an MBA degree.

    “The biggest cost of undertaking an MBA is often the earnings forgone while studying. In difficult times those earnings may fall or even disappear, reducing the opportunity cost of taking a year out.”

    In this one sentence, the author is saying several things regarding opportunity costs. One, the costs associated with earning an MBA degree are not limited to the money spent on tuition and books. It also includes money which could have been earned if the person worked instead of taking classes. Two, opportunity costs can, and often do, change. During a recession, incomes fall and as a result, the opportunity cost of pursuing a graduate degree also falls. Understanding that opportunity costs exist and can change, improves decision making.


    This page titled 1.2: Scarcity and Choices is shared under a not declared license and was authored, remixed, and/or curated by Martin Medeiros.

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