How Scarcity and Other Factors Affect Consumer Decisions and the Choices Made by Governments and Individuals
This section focuses on the concept of scarcity and how scarcity affects economic choices made by governments and individuals, as well as how scarcity and other factors influence consumer decisions. The material presented is designed to help you meet the following objectives.
- Determine ways that scarcity affects the choices made by governments and individuals.
- Compare and contrast characteristics and importance of currency.
The idea of scarcity consists of two components: limited resources and unlimited wants. Classical economic theory posits that human wants invariably exceed the amount of resources that exist to fulfill these wants.
Another way of looking at this is that scarcity disrupts supply-and-demand equilibrium: the price of a scarce good will rise until it reaches equilibrium. At this point, fewer people will be able to afford it. If consumers (or organizations, or governments) desire to obtain a scarce good, they will need to conduct a cost-benefit analysis, ideally purchasing only if the benefit of obtaining the good is greater than its cost. Sometimes, after an economic crisis (as with the Great Depression), it may take a long time and a great deal of effort to return to equilibrium.
The main way to minimize scarcity is through productivity. According to the authors of The Classroom Mini-Economy: Integrating Economics into the Elementary and Middle School Curriculum, "Production is the process in which productive resources are combined to create goods and services." Productive resources such as labor are referred to as inputs, while end products, goods and services, are referred to as output. Productivity usually refers to productive labor in part because labor is easy to measure based on output per hour worked. Productivity can be increased by supplying adequate capital resources (the proper equipment), improving productive technologies, improving labor skills, and increasing areas of specialization. When productive resources like labor are used efficiently and productivity increases, this usually results in a higher standard of living (Day and Ballard, p. 24).
Another way of thinking about cost/benefit analysis is the concept of opportunity cost. Opportunity cost comes into play while deciding how to allocate resources and also when making consumer decisions.
Each choice made when applying the three basic economic questions to allocation of resources (what to produce, how to do this, and who gets the product) creates an opportunity cost; i.e., it is generally not possible to produce every type of desired good in unlimited quantities, so a choice has to be made about which goods will be prioritzed. The goods that are not prioritized make up an opportunity cost: fewer of them (or maybe none at all) will be produced.
Applied to making purchases, opportunity cost is the tradeoff made when a consumer has to make a decision between two options, whether this is between two products or between making a purchase or not making it. The cost of a good or service is more than simply monetary, according to this concept; in making a decision and taking action, the next best alternative has to be given up. This cost can also be thought of in terms of relative price, the price of one commodity as compared to another, which is expressed as a ratio between two prices.
Click the link to view a brief video on opportunity cost.
http://www.youtube.com/watch?v=ezOdQUzLVAo
For a more in-depth look at how productivity addresses scarcity, click the following link and read pages 23-5.
http://www.unm.edu/~jbrink/365/Documents/ClassroomEconomyBooklet.pdf
This hands-on Scarcity game at the following link demonstrates how scarcity requires making economic choices and introduces students to economic terms such as capital, labor, entrepreneurship, and production, along with concepts like opportunity cost. (See link at end of the second paragraph to start the game.)
