scarcity

Carol Mathias

Scarcity is the problem of economics.

• Scarcity occurs because people’s wants and needs are unlimited, and the resources needed to produce goods and services are limited.

Things that are scarce:

• Money is scarce! (no kidding!)

Things that are scarce:

• There is only so much oil in the world.

Things that are scarce:

• In Japan, 96% of all the land in the country is being used. Land is scarce. Prices for renting space in the Ginza District is $6,000 per square foot.

Things that are scarce:

• Elephants are on the critical list of endangered species. Poachers kill them for the ivory, Asian medicines and aphrodisiacs.

Economics

• The social science that deals with how society allocates its scarce resources among its unlimited wants and needs.

Economics

• Economists advise individuals or societies about choosing which needs to satisfy and how much of our resources we need to satisfy those needs.

Resources

• The factors of production:– Natural resources

– Human resources

– Capital resources

– entrepreneurship

There are two branches in Economics:

• Macroeconomics

• Microeconomics

Macroeconomics:

• The branch of economics that examines the behavior of the whole economy at once.

One Reason for Economic Troubles in 2006: A NEW chief!• Transition

Problems!– New chief

macroeconomist for the US Economy.

– Change-over from Greenspan to Bernanke.

– We have economic problems.

Macroeconomics

• Alan Greenspan is a macroeconomist. His position at the as Chairman of the Federal Reserve called for him to control the money supply for the economy.– He did a GREAT job since

1985 – 2006.

The New Chairman of the Fed: Ben Bernanke

• Economics degrees from Harvard and MIT

• Professor of Economics at Princeton– Wrote books, articles,

text books on economics.

The new Chairman of the Federal Reserve: Ben Bernanke• Came to

Greenspan’s attention with his work on the National Bureau of Economic Research.– He recommended him

with others to President Bush.

So what is wrong with the US economy right now?

Bernanke’s BIG concern for the US Economy is:• INFLATION!

– Prices go up faster than our wages do!

– WHY WOULD THIS BE BAD????

INFLATION

• Since July 2005 inflation has caused prices to go up 4.1% (counting food and gas)– 2.7% if you take that

out.

Why would inflation be bad for the economy? For you?

• Jobs?• Hours?• Pay?• Less for spending?• Less for saving?• More incentive to

put your money in the bank.

If inflation is happening, what do you demand from your jobs?•

IF inflation is happening and employees demand more money – what do businesses have to do?

• Raise prices!• OR cut into profits.

– Can be QUITE dangerous to not have enough in savings for the bad patches of business!

What can Bernanke do to stop inflation????• Interest Rates• Money Supply• Slow the Velocity

of the dollar

How does Bernanke control the economy?

• INTEREST RATES!

• Interest rates = how much it costs to get money.

• You ask for a loan of $10,000. The bank charges you 6% - or $600 to get the $10,000!

• Total payback to bank: $10,600.

Bernanke orders all banks in the country to RAISE their interest rates … • Money costs more to

get. • Some people may not

be able to “afford” money.– Less shopping– Less travel– Less building businesses /

houses– Buying less cars or goods

that depend on interest rates.

Why would Ben Bernanke do that to us????

If interest rates are high (which the are) what is going to have to happen if someone wants to sell their house?

• People have to lower their asking price.– Less profit

Who benefits?

• Lower prices mean more people might be able to buy a house.

• Bernanke wants “realistic” prices.

SOURCE: http://calculatedrisk.blogspot.com/2005/06/when-bubble-will-burst.html

The Housing Bubble Markets

Higher Interest Rates slow spending• What does that

mean for wages?– Lower wages

– More hours with less people

– unemployed

IF people aren’t spending – what do stores have to do to get you to shop?• LOWER PRICES!

If prices come down then inflation is tamed. • People shop• People travel• Employment goes

up, with lower wages.– BUT, if prices are

reasonable –

The economy is fixed!

If interest rates are high:

• People SAVE their money.

• They can’t spend it, so if there is less money available …

If less money is available …

• Businesses have to figure out ways to cut costs.– Lower wages– More efficiency moves– “gimmicks” for

customers • New and Improved!• Better service

– Lower prices

If prices come down then inflation is tamed. • People shop• People travel• Employment goes

up, with lower wages.– BUT, if prices are

reasonable –

The economy is fixed: Macroeconomics to the rescue!

Microeconomics

• Microeconomics is the branch of economics that examines the choices and interaction of individuals concerning one product, firm or industry.

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Microeconomics

• Microeconomists would be interested in why people prefer Coke over Pepsi, or how to make more money on the Stock Market.

Economists seek answers to:

• What to produce?

• How to produce?

• For whom are they producing for?

The Three Basic Economic

Questions!

Economists….

• Try to answer the basic economic questions.

• Evaluate the options for production.

• Analyze the potential opportunity costs (trade-offs) and opportunity benefits of any decision.

Economists use theories to explain their ideas

• A theory is a model or a simplified description of reality.– EXAMPLE OF A

THEORY:

– Wage Differential Theory – The Glass Ceiling

The Economic Way of Thinking

• People gain from voluntary trade.

• Everything has a cost.

• People choose for good reasons.

• Incentives matter.

• People create economic systems to influence choices and incentives.

• The value of goods or services is affected by people’s choices.

The Economic Way of Thinking:

• Economic thinking is marginal thinking.

• Economic actions create secondary effects.

• The test of a theory is its ability to predict.

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Lesson Summary

• The essence of economics is logic.

Steps of Decision Making Grids

• Identify the problem.

• List alternatives for answering the problem.

• List criteria – what you want to get out of your decision.

• Rank criteria with alternatives.

• Make the decision.

Exchange

• If consumers buy more Blackberrys over Sprint, what does that tell Sprint?

Exchange

• Producers gain information through a process called an EXCHANGE – it which producers and consumers agree to provide one type of item for another.

Exchange takes one of three forms:• Barter• Money• Credit

Money has three functions

• Standardized item that is generally traded for goods and services.

• A measure of value that allows both producers and consumers to determine and express worth.

• A store of value that can be saved and used to purchase at a later date.

Money has VALUE

• Value is determined by a product’s UTILITY.– Usefulness to

a person.

MOST items have DMU

• Diminished Marginal Utility – usefulness decreases as it is used more and more.

Other Terms to know:

• Goods: Physical objects that are purchased.

• Services – actions or activities done for a fee.

• Capital Resource – capital goods and money.

• Capital Goods – buildings, machinery, tools, etc

Terms to Know

• Consumer Goods – what people buy.

• Productivity – level of output that results from a level of input.

• Efficiency – having the least possible input and get the greatest output.

Terms to Know

• Credit – Third form of exchange. People can use item while paying for it.

• Self-sufficiency – people fulfill needs without outside assistance.

Terms to Know

• Interdependence – one area can influence the economy in another sector or the world.