GETTING DOWN TO Business: Scarcity and opportunity costs

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GETTING DOWN TO Business Scarcity and
opportunity costs
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Questions

• Does Bill Gates have to deal with scarcity?
• What about the United States Government?
• Is it possible to eliminate peoples wants?

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The Two Paths of Scarcity

• Because we know scarcity exists, there arises two
  distinct consequences
• 1.) The need for a rationing device
• 2.) Competition

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What is a rationing device?

• A rationing device is a way to decide who gets
  what amount of available goods or resources (add
  to your definitions list).
• Obvious Example MONEY!!!
• However, if money didnt exist, do you think
  people would develop an alternative rationing
  device?

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Competition

• We live in a competitive world
• Grades, sports, attention, more friends, nicest
  caretc.
• What is one thing you are competitive about?
• Draw a flow chart showing the two paths of
  scarcity.

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Opportunity Costs

• Add this to your list of definitions
• Opportunity Costs the most valuable thing you
  give up when you make a choice (the next best
  thing).
• It can only be 1 thing!!!
• Trade-offs are basically the same as opportunity
  costs (when I choose one thing over the other, I
  am giving something up)

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Opportunity Costs Continued

• Opportunity Costs change the way people behave.
• Example Ice Cream and cookies
• Everyone knows that I love cookies. If my only
  dessert option was ice cream, most likely I would
  choose that. However, given the choice, I would
  choose cookies over ice cream every time. The
  opportunity cost of choosing ice cream is loosing
  out on cookies.

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The Importance of Good Information

• We talked in class today about how important it
  was to have all the information before making a
  decision.
• When one party holds more information than
  another, in economic terms, we call this
  asymmetric information (write that down in your
  definition list).

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Examples of Asymmetric Information

• The Used Car Salesman A used car salesman wants
  to fetch a high price for a quality used vehicle.
  However, because the buyer doesnt trust the
  salesman, and doesnt know all of the information
  about the car, the buyer offers a much lower
  amount than the salesman is willing to accept,
  and there is no deal.

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Insurance

• Insurance companies must always work with
  asymmetrical information. When offering car
  insurance, there is simply no way to know for
  sure whether one driver is a safe driver or not.
  Therefore they must charge a higher price than if
  they could divide the good and bad drivers.

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Examples in Real Life

• Think of a time in your life when you either had
  more information than a person you were involved
  with, or someone withheld important information
  from youhow did that impact your decision?

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Quiz Time!!!

• True of False
• Even rich people must deal with scarcity.
• Scarcity only ever takes one path.
• Money is an example of a rationing device.
• We live in a competitive world.
• Opportunity costs are basically the same thing as
  trade-offs.
• There can be multiple opportunity costs.
• Asymmetric information is when everyone is on the
  same page.