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Explain how consumers and producers confront the condition of scarcity, by making choices that involve opportunity costs and trade offs.

A graph showing the average prices of gasoline in the US between 1974 and 2004
A graph showing the average prices of gasoline in the US between 1974 and 2004

Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost.

Topics on the Page
Limited Resources and Unlimited Wants
Opportunity Costs
Supply, Demand and Equilibrium
Example: Oil
Example: Water

Scarcity Sign: "There are shortages of everything except bullets"
Scarcity Sign: "There are shortages of everything except bullets"

Limited Resources and Unlimited Wants

To understand Scarcity you need to understand these two facts:
  1. Limited Resources: At any given time, the resources available to a society are limited. There is only so much oil, gold, timber, or wheat; just so much capital, just so much labor. Resources, the inputs used to make consumer and producer goods, are limited.
  2. Unlimited wants: people, individuals, families, or larger groups, have needs, wants, and desires which they would like to be satisfied, as much as they can be, by the goods and services produced by employing the society's limited resources. However, wants and desires, unlike resources, appear to be virtually unlimited. History and psychology show us that hey may never be satisfied, since satisfaction of some wants only seems to lead people to acquire new wants.

Summary: all kinds of resources are LIMITED and all wants from consumers/people are UNLIMITED.

This difference in limitations is what creates the concept of scarcity.

Resources are limited and need to be directed towards satisfying the wants of consumers that benefits BOTH the consumer and producer.
See the source image
See the source image

What Happens when Demand is greater than Supply?
    • The price usually goes up. If lots of people want something, you have to pay more to get it.
    • At times producers create artificial shortages to drive the price up because there will be greater demand for the products. At times the government gets involved in the market and sets a price ceiling
What happens when Supply is greater than Demand?
    • When quantity supplied is higher than the quantity demanded, there is an excess of goods produced which are not used which leads to surplus, as consumers are not consuming the goods or buying them.
    • When there is excess goods or competition in the market it drives prices down which helps consumers to get value for their money. However producers will always set the price where their expenditure to produce the product is equal or greater.
Demand and Supply Video
Opportunity Costs
  • Producers face a limited amount of resources (raw materials, human capital, etc), and therefore are only able to generate a limited amount of output or consumer goods.
    • Consumers must then ration their own resources to determine, essentially, how to maximize their utility. For example there is a consumers income. Do they send their limited income on essentials like food and other basic needs or buying that next generation $700 phone. They cant have both so they make their decision based on their limited resources compared to their wants, which is more important to them, food or phone.
  • This is where the concept of trade-offs comes into play, other wise known in the economic world as Opportunity Cost.
    • Consumers must establish their opportunity costs in determining which goods and services generate the most utility, given a scarce amount of resources some of which they must give up.
    • For example do you go to that concert you really want to go to or work that day for extra pay. Based on the individual some will find the concert of more value to them, others would like prefer the extra money.
    • Its that trade off that makes up opportunity cost. If your wants and desires directs your limited resources to one good or service you will miss out another good or service.
    • Opportunity cost can be understood as the cost of the foregone alternative. For example, choosing bananas over apples and the cost for not choosing apples is the opportunity cost.
Opportunity Cost video
Supply, Demand and Equilibrium

See the source image
See the source image

  • Ultimately, scarcity determines supply, demand and equilibrium.
    • For consumers (DEMAND), scarcity determines how much of limited resources they must give up (or opportunity costs they are sacrificing) to maximize their utility. Which good should they spend their resources on, which gives them the most bang for their buck so to speak.
    • For producers (SUPPLY), scarcity determines which good and how much of that good they should produce that will maximize their profit with out flooding or shorting the market with their good.
    • EQUILIBRIUM: this is the concept that supply meets demand. There is not too little or too much of a good on the market while also not having to little or too much demand for the same good. There is just enough of both.
  • Equilibrium is the state in which market supply and demand balance each other and, as a result, prices become stable. Generally, when there is too much supply for goods or services, the price goes down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium.

Disruptions to Economic Equilibrium
    • The balanced state of economic equilibrium can be disrupted by exogenous factors, such as a change in consumer preferences. This can lead to a drop in demand and, consequently, a condition of oversupply in the market. In this case, a temporary state of disequilibrium will prevail until a new equilibrium is identified.

Read more: Economic Equilibrium https://www.investopedia.com/terms/e/economic-equilibrium.asp#ixzz5DVw8IYk9
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Multimedia.pngClick here for a short, five minute video that clearly explains scarcity in relation to consumers in economics.

Click here for a video explaining opportunity cost. (Start at time mark 20:35)
    • Author of this ^ video does great stuff on economics, highly recommend watching his other videos for further economic topics.

Screen Shot 2016-01-04 at 11.31.08 AM.pngActivity to show scarcity/lesson plan click here

Environmental Scarcity article click here

US petroleum production & imports, 1920--2005
US petroleum production & imports, 1920--2005

Example: Oil

See Special Topic Page on Oil in Central Asia

Oil exists in a limited supply in the world.

The limited amount determines the supply and opportunity cost. People must ration out the utility of the oil to maintain an equilibrium in the market.

Where Does America Get Oil? You May Be Surprised from NPR (April 12, 2012).

Example: Water

See Special Topic Page on Small Island Nations and Rising Sea Levels

Water Scarcity Threats from World Wildlife Fund

5 Ways to Teach Students About the California Drought

Case Study by the UN click here
external image Red_Apple.jpg

Water-Diamond Paradox

Example: Diamonds

external image diamond-producer-map.gif