Unit 1 · Topic 1.1

Scarcity

Scarcity means resources are limited while wants are not, so every choice involves a trade-off.

Practice 1: Principles and Models

Part 1 · Hook

Why this matters

A print shop owner has one big press and one Saturday. A wedding couple wants invitations, a store wants banners, a cafe wants menus. She can print only one job, so taking one means turning down the others. Every person, business and government faces the same squeeze: there is never enough to do everything, so every choice gives something up.

Part 2 · Prerequisite check

Quick check before you start

1. A table lists three jobs worth $900, $650 and $400. Which is worth the most?

  1. The $900 job
  2. The $650 job
  3. The $400 job
  4. They are worth the same
Show the answer

Compare the values directly: 900 is the largest.

  • Correct: The $900 job:
  • The $650 job:
  • The $400 job:
  • They are worth the same:

2. On a graph, the horizontal axis

  1. runs left to right
  2. runs up the side
  3. is always labeled Price
  4. shows the slope
Show the answer

The horizontal axis runs along the bottom.

  • Correct: runs left to right:
  • runs up the side:
  • is always labeled Price:
  • shows the slope:

Part 3 · See it

See it first

A diagram: unlimited wants and limited resources (land, labor, capital, entrepreneurship) create scarcity, so every choice has a trade-off. Maya picks a $96 lifeguard shift over $60 of tutoring and $40 of soccer; the opportunity cost is the next-best choice, $60.
Unlimited wants and limited resources make scarcity, so every choice has a trade-off. Maya picks a $96 lifeguard shift; its opportunity cost is the next-best choice, $60 of tutoring, not $100. Invented example. LevlPrep original diagram.

Part 4 · Step by step

How it works, step by step

  1. Wants are unlimited and resources are limitedthere is scarcity: not every want can be met
  2. Scarcity means you cannot have everythingevery choice is a trade-off: getting one thing means giving up another
  3. You pick the best option and give up the restthe value of the next-best option you gave up is the opportunity cost
  4. You compare each option with its opportunity costyou can tell whether a choice is worth what it gives up

Part 5 · Key ideas

Key ideas

  • Scarcity: limited resources and unlimited wants. It affects rich and poor people, firms and governments alike.
  • The factors of production (resources) are land (natural resources), labor (human effort), capital (tools, machines, buildings) and entrepreneurship (organizing and risk taking). Money is not capital in this sense.
  • Most resources are scarce, but some are not used up when used: an idea or a piece of knowledge can be shared by everyone at once.
  • Every choice is a trade-off. Its opportunity cost is the value of the next-best alternative given up: one option, not all of them added together.

Part 6 · Misconception

A common mistake

The wrong idea: The opportunity cost of Maya's lifeguard shift is $100: the $60 of tutoring plus the $40 of soccer she gave up.

What actually happens: She could have done only one of the other two, so the opportunity cost is the single next-best choice: tutoring, worth $60.

Part 7 · Check yourself

Check yourself

Exam-style questions. Anything you miss goes into your review queue.

1. What does scarcity mean in economics?

  1. A good has run out in stores
  2. People with low incomes face it, but others do not
  3. Resources are limited while wants are unlimited
  4. Prices are higher than people would like
Show the answer

Scarcity is the gap between limited resources and unlimited wants. It is always present, not just when shelves are empty.

  • A good has run out in stores: A store running out is a stock-out at one moment; scarcity never goes away.
  • People with low incomes face it, but others do not: Rich people, firms and governments face scarcity too, at least of time.
  • Correct: Resources are limited while wants are unlimited: Right: limited resources, unlimited wants.
  • Prices are higher than people would like: High prices can follow from scarcity, but they are not what it means.

2. Which of these is capital, as a factor of production?

  1. Cash in the bakery's bank account
  2. The baker's skill at decorating cakes
  3. The farmland the wheat grows on
  4. An oven in a bakery
Show the answer

Capital means goods made to produce other goods: tools, machines and buildings. An oven qualifies.

  • Cash in the bakery's bank account: Money buys capital but is not itself a factor of production.
  • The baker's skill at decorating cakes: Effort and skill are labor.
  • The farmland the wheat grows on: Farmland is a natural resource, so it is land.
  • Correct: An oven in a bakery: Right: a machine used to make bread.

3. A free concert is held on a weeknight. For a student who would otherwise work a $50 shift, what is the opportunity cost of going?

  1. Zero, because the ticket is free
  2. The $50 shift she gives up
  3. The price other people pay for concerts
  4. The cost of the band's equipment
Show the answer

The ticket price is zero, but going means giving up her next-best use of the evening: a shift worth $50.

  • Zero, because the ticket is free: A free ticket still costs the time, and the time had another use.
  • Correct: The $50 shift she gives up: Right: the next-best use of her time.
  • The price other people pay for concerts: Other people's prices are not what she gives up.
  • The cost of the band's equipment: The band's costs are not a choice she makes.

Data

Harbor Lane Print Shop's Saturday

Jobs the shop could print on its one press this Saturday, and what each is worth to the shop after materials (invented data for practice)
JobWorth to the shop ($)
Wedding invitations900
Store banners650
Cafe menus400

4. The shop chooses the wedding invitations. What is the opportunity cost of that choice, in dollars?

Type a number ($). A four-function calculator is allowed, as on the exam.

Show the answer

The next-best job is the banners, worth $650. Only one other job could have been printed, so the opportunity cost is max⁡(650,400)=650\max(650, 400) = 650 dollars.

  • Answer: 650 $

Scenario

Juniper Ridge Bike Co. starts up

Ana Ruiz quits her job and puts her savings into a bike repair company, Juniper Ridge Bike Co. She rents a lot beside a river and uses its water to wash bikes. She hires two mechanics, buys wrenches, a repair stand and a delivery van, and spends her evenings deciding which repairs to offer and what to charge. (An invented company.)

5. Which factor of production are the wrenches, the repair stand and the delivery van?

  1. Land
  2. Labor
  3. Capital
  4. Entrepreneurship
Show the answer

Tools, machines and vehicles made to produce other goods and services are capital.

  • Land: Land means natural resources such as the lot and the river water.
  • Labor: Labor is the mechanics' effort.
  • Correct: Capital: Right: tools and machines are capital.
  • Entrepreneurship: Entrepreneurship is Ana's organizing and risk taking.

Part 8 · Summary

Summary

Scarcity means resources are limited while wants are not, so every choice involves a trade-off. The resources used to make goods and services are the factors of production: land, labor, capital and entrepreneurship. The opportunity cost of a choice is the value of the next-best alternative you give up, only the next best, and it includes time and other things that are not paid for in money.

Part 9 · Up next

What comes next

Part 10 · Connections

Connections

Question set for this topic