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Scarcity, Choice and Decisions

Introduction

The interrelated concepts of scarcity, choice, and costs form a basic economic trilogy. Since most families have financial resources far more limited than their wants, individuals and families face the problem of dealing with money scarcity. Deciding how to use scarce resources is a problem of societies as well as families. And every choice involves an opportunity cost – i.e., by deciding to use resources in one way, the decision-maker must give up all opportunities to use them in another way.

Concepts

  • Scarcity
  • Opportunity costs and trade-offs
  • Scarcity is caused by having relatively unlimited wants but only limited resources
  • Scarcity requires people to make choices about using resources to satisfy wants
  • Opportunity cost is the highest valued alternative that is disqualified by choosing an option
  • All economic decisions involve opportunity costs
  • Weighing the costs and benefits of alternatives is the nature of effective economic decision-making

Objectives

  • Define the opportunity cost of a decision as the most valued discarded option
  • Analyze trade-offs involved in making spending decisions.

Time required

Two class periods:
Day One - Activity 1
Day Two - Activity 2 and Assessment

Materials - If you are working offline

Procedure

If your class is not working online, distribute a hard copy of Planning the Prom, to each student. Divide the class into groups of four or five students. Ask each group to reach a decision about how the funds should be used for the dance. They should also prepare an answer for the Discussion Question on the activity sheet.

Then lead a class discussion, focusing on the trade-offs that had to be made. Clarify for students how differing preferences resulted in different choices and tradeoffs.

Frequently, students choose to hire an expensive band and cut corners elsewhere. Their problem can be shaped by defining the senior class project in a way that will make the decisions more difficult – for example, if the class project is defined as raising money to buy a motorized wheelchair for a disabled classmate.

The dance problem is similar to family decisions in that difficult choices must be made, and compromise becomes necessary because of the various opinions of family members. But this problem is unlike family decision-making in some critical ways.

  1. This is one of the few decisions that this group will make together.
  2. A family has to continually decide how to spend money on food, shelter, clothing, and transportation, as well as entertainment.
  3. Many family decisions must be considered with respect to their long-term as well as their immediate effects.

If students are not working online, distribute one copy of Scarcity, Choice, & Decisions to each student. Instruct students to review Corny's budgetary situation and then construct their own budget. Students' budgets and responses to the questions will, of course, vary greatly.

Assessment

A discussion of some students' hypothetical budgets can be used to assess the students' understanding of the concept of scarcity and opportunity costs. Student budgets should show that different people evaluate opportunity costs differently.