My definition highlights an important component of economics: SCARCITY. The reason why I didn't have a boat, or the reason why you don't have everything that you want is because of SCARCITY. Show The term "scarcity" has a slightly different definition in an economics class than it does in the "real" world. NOTE: Many words have different meanings in an economics class than the definition that you may already know. For example, let's take the word DEMAND. If I ask you "What happens to the demand for boats when the price of boats goes up?" So back to the term SCARCITY. Scarcity does not mean that only a little of something is available. For example, I grew up in northeastern Minnesota . About 30 miles away from my hometown was the town of Erskine, Minnesota. Just outside of town a certain type of rock exists that occurs nowhere else in the world. They have named it "Erskinite". Erskinite is only found near Erskine, Minnesota and only a little of it has ever been found. BUT IT IS NOT SCARCE. -- WHY? - - Because nobody wants it. For there to be scarcity things must be LIMITED and WANTED. There is plenty of ERSKINITE and it IS NOT SCARCE because nobody wants it. Goods and services are scarce. These are the things that we want. Goods are tangible things that satisfy our wants (like boats, computers, cars, etc.), services are intangible things that satisfy our wants (like the services of an accountant, or a dentist, or a lawyer). Even in the United States - one of the richest countries in the world - goods and services are scarce. WHY? This brings us to another important principle in economics. After teaching economics for a year or so, I bought a boat. Since I defined economics as the study of why I didn't have a boat - I had a problem. But then I simply changed my definition slightly. Now economics is: the study of why Mark doesn't have a . . a . . .a what? This brings us to that second principle: economists assume that humans have UNLIMITED WANTS. Once I got a boat, I wanted a bigger boat. After getting a bigger boat I wanted a sailboat. then a row boat, and . . . and the list goes on and on. (I now own 5 boats and I want a jetski.) Do we ever have EVERYTHING that we could ever want? Since human wants are unlimited, and resources used to satisfy those wants are limited - there is scarcity. Even in the US, one of the richest countries in the world, there is scarcity -- if we use our new definition of SCARCITY. Do you have everything that you want? There is always scarcity, because human wants are unlimited. This then brings use to a third important idea: Because of scarcity we MUST MAKE CHOICES. Some economists call this the "economizing problem". We can't have everything that we want so we have to choose. This is what economics is really all about - MAKING CHOICES. Because of scarcity we as individuals, and our society as a whole, must make choices. For example when I was thinking about buying a boat, I also needed shoes for my daughter. If we assume that I couldn't afford both (again - can you afford everyhting that you want?) I had a choice to make a boat or shoes? Hm-m-m-m-m? ? ? - - - - - I have a nice boat! Our goal is to make choices that reduce scarcity as much as we can. Because of unlimited wants we can never eliminate scarcity, but it can be reduced by the right choices. Hopefully, this is what governements attempt to do: make the right choices to reduce scarcity and increase the standard of living for their citizens. Another way to say this is that we want to get the MAXIMUM SATISFACTION possible out of our limited resources. We don't want to make just any choice, we want to make the BEST choice. There are three, and only three, options (choices) for society to deal with scarcity, and all societies must deal with scarcity because there are limited resources and unlimited wants. Those three options are:
Let's look at each of these briefly. Economic Growth (the first "E") Let's define Economic Growth as an increase in the ABILITY to produce goods and services. This is not the way the term is normally defined. Later this semester we'll discuss the various definitions of Economic Growth, but here we'll use this more fundamental definition: Economic Growth is an increase in the ABILITY to produce goods and services. This means we are ABLE to produce more, but it doesn't necessarily mean we do produce more. More on this later. This type of Economic Growth is caused by: a) more resources If we only had more resources we could produce more goods and services and satisfy more of our wants. This will reduce scarcity and give us more satisfaction (more good and services). All societies therefore try to achieve economic growth. Reducing Wants A second way for a society to handle scarcity is to reduce its wants. If we just didn't want so much then there would be less scarcity. For example we know that gasoline is scarce. (Can you get all that you want for the price you want? If you have to pay a price for something, then it is scarce.) Space on our roads is also often very scarce. Let's say that the president of the United States decides to do something about these problems by initiating a new program called: SHARE A CAR WITH YOUR NEIGHBOR. It includes a law that says there can only be ONE CAR FOR EVERY TWO FAMILIES. This would reduce the scarcity of gasoline and space on our roadways, but . . . . let's impeach that president!!! The option of REDUCING WANTS is one of the options that societies have for dealing with scarcity, but it is not a very good option. Maybe during war time, if our president asks us to "share a car with our neighbor", we would. But it is not a long-term solution to the problem of scarcity that most of us would accept. Although it is an option that we should keep in mind. That brings us to the third option for dealing with scarcity (and to the remaining 4 "E's" of economics.) Using our existing resources wisely = maximizing satisfaction Societies can reduce scarcity not just by (1) getting more resources, better resources, or better technology (i.e. ECONOMIC GROWTH), or by (2) REDUCING ITS WANTS, but also by (3) USING ITS EXISTING RESOURCES WISELY There are four ways that societies can use their EXISTING resources to reduce scarcity. I call these the 4 Es of economics - four ways to use our existing resources to reduce scarcity and obtain the maximum satisfaction possible. The fifth E (economic growth) also reduces scarcity and gives us more satisfaction but it does it by using ADDITIONAL resources. Societies will try to achieve all 5 Es of economics. The four ways that societies can use their EXISTING resources to reduce scarcity are:
Maximizing Satisfaction -- Let's discuss each of these individually keeping in mind
PRODUCTIVE EFFICIENCY Productive efficiency can be defined as, or achieved by, producing at a minimum cost By producing at a minimum cost, FEWER RESOURCES are used and MORE can be produced. This reduces scarcity and gives us more satisfaction from our existing resources. We can produce at a minimum cost and achieve productive efficiency by: a. not using more resources than necessary Let's look at each of these individually using some examples. REMEMBER our goal is to understand how they reduce scarcity and help society achieve the maximum satisfaction possible from its existing resources. This is the goal of economics. You must keep this goal in mind as we go through these examples. not using more resources than necessary How does this MAXIMIZE SOCIETY'S SATISFACTION? using resources where they are best suited The second way to produce at a minimum cost and achieve productive efficiency is to use resources where they are best suited. using appropriate technology The third way to produce at a minimum cost and achieve productive efficiency is to use the appropriate technology. By "appropriate" we mean the technology that minimizes the costs. Sometimes this is termed the "best "technology. But I prefer "appropriate" because "best" my infer "high tech" or computer technology. But the most up-to-date technology is not always the most appropriate (lowest cost). Allocative Efficiency The second way to use our existing resources to maximize society's satisfaction is allocative efficiency. Allocative efficiency is using our limited resources to produce:
How does this MAXIMIZE SOCIETY'S SATISFACTION and REDUCE SCARCITY? If we want to achieve the maximum satisfaction possible from our limited resources, we not only have to be productively efficient (use as few resources as possible, use our resources where they are best suited, and use the appropriate technology), BUT WE ALSO HAVE TO PRODUCE THE RIGHT GOODS AND SERVICES. It would be a waste of our limited resources to produce a lot of things that we don't want and few of the things that we do want. For example: a. steel: horseshoes or cars Allocative INefficiency occurs when we use our limited resources to produce TOO MUCH or TOO LITTLE. This results in surpluses and shortages. How does allocative inefficiency affect scarcity and our attempt to maximize our satisfaction? Whenever we produce too much (surplus) or too little (shortage) we are allocatively inefficient. We are NOT using our resources in a way that would achieve the maximum satisfaction possible. Examples of allocative inefficiency: (1) US agriculture producing mountains of unwanted grain WHAT CAN BE DONE to achieve allocative efficiency? In a market economy, or pure capitalism, the price will adjust to achieve allocative efficiency. Inefficiency occurs when the government interferes or if one or a few firms have control over the market. Equity The third way to use our existing resources to achieve the maximum satisfaction possible is equity. Equity is a "fair" distribution of income, or goods and services. (NOTE: this is not the same definition used by accountants.) One problem with this definition is agreeing on what "fair" means. Fair does not mean "equal". Would an equal distribution of income be good for society? Would it be good if doctors were paid the same as janitors? Probably not. If we paid doctors the same as janitors we would have few doctors, and the would not put in the time needed to learn medicine. We know that equity is good for society (it is one of the five Es). So equitable cannot mean the same as equal. But we can't measure "fairness". This is a problem for economists. But we can DESCRIBE the actual distribution of income and I will also try to explain how equity does help society achieve the maximum satisfaction possible from its limited resources. The Distribution of Income. When economists describe the distribution of income they usually divide the population into groups of equal sizes (usually five called quintiles) according to their income levels. In the first quintile the put the poorest fifth (20%) of the population. In the fifth quintile they put the richest twenty percent. and they divide the remainder into the other three groups according to their incomes. For data on the distribution of income in the US see: http://www.census.gov/ftp/pub/hhes/income/histinc/h02.html For 1998 the US distribution of income was: Lowest FifthSecond FifthThird FifthFourth FifthHighest FifthTop 5 %3.69.015.023.249.221.4Comments (discussion forum) ? How does equity help society achieve the maximum possible satisfaction from its limited resources? President Bush example Full Employment The last E is full Employment. Here we will define full employment as using ALL available resources, not just labor. This means that if we have full employment we are using all of our labor, factories, mines, fields, etc. How does full employment help society achieve the maximum satisfaction from its limited resources? Even though it seems simple to me, students have a difficult time understanding why employment of all our resources is necessary if we are to produce all we can and achieve the maximum satisfaction possible from our existing resources. If we have full employment, we produce MORE. If we have unemployed resources, we produce LESS. This is why society's strive for full employment - it reduces scarcity and helps achieve the maximum satisfaction possible. What is MACROECONOMICS? ECO 212 ONLINE! is a course in MACROECONOMICS. In a Macroeconomics course we will study the WHOLE ECONOMY or the ECONOMY OF A COUNTRY. The Macroeconomic Issues are:
If we use our 5 Es framework, in a course in Macroeconomics you would study ECONOMIC GROWTH and FULLEMPLOYMENT. In a course in MICROECONOMICS you study the INDIVIDUAL parts of an economy. Issues would include the determination of prices of individual products, studying individual industries, or making individual consumer choices. Using our 5Es framework, a course in Microeconomics would study ALLOCATIVE EFFICIENCY, PRODUCTIVE EFFICIENCY, and EQUITY.The The only component of economnics not included in either a Macroeconomics course or a Microeconomics course is "Reducing consumer wants.' Why Study Economics? One last thing I'd like to discuss briefly in this introductory lecture is "why study economics?" Most of you are taking this class because it is REQUIRED for your major. Right? Most of you are probably business majors (management, finance, marketing, accounting, etc.), but other majors sometimes also require a course in economics (political science, engineering, dietetics, education, nursing,). Another reason to take an economics course is to become a more informed voter and citizen. Much of what the candidates and political leaders discuss can be better understood with a knowledge of economics. This semester let's pay attention to the economic and political news. We can use the discussion forum to discuss what we see and hear. Which of the following is true about scarcity?The correct choice is a.
Scarcity is a situation where the available resources are limited (not enough) to meet the unlimited needs of people. These...
What is the study of how people use limited resources to satisfy unlimited wants?Economics: the study of how individuals, families, businesses, and societies use limited resources to fulfill their unlimited wants.
What word refers to the gap between limited resources and unlimited wants?Scarcity refers to a basic economics problem—the gap between limited resources and theoretically limitless wants. This situation requires people to make decisions about how to allocate resources efficiently, in order to satisfy basic needs and as many additional wants as possible.
Which of the following best describes scarcity?Answer and Explanation: The correct answer is b. Resources are scarce when compared to the demand for them. Scarcity is an economic problem, and it is defined as the gap between the unlimited wants of individuals and limited resources in the economy.
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