Economics and Scarcity

Economics

Why do you do what you do with your money? Why do I do what I do with mine? What does anyone do whatever they do with theirs, and why might we each do different things? At the core of it all, economics boils down to a not-so-simple study of why people behave in the ways that they do with the resources that they have. It’s a very dynamic study, it can feature things like where the person is geographically, the time period historically, even things like the colours they saw on signs on the way into a store, or conversations they heard in passing. More than just what you choose to buy, it’s equally concerned with what you choose NOT to buy, and specifically the why behind your decision not to buy it - as there may be associated values or “opportunity costs” with the alternatives (we’ll talk about that later).

In life we simply cannot have everything. Even with the most resources possible, the richest person in known history Mansa Musa couldn’t have bought a long enough life to have had the time to have enjoyed all he could have afforded. We see in Mansa Musa that wealth can be defined not only in resources such as gold and other currencies. Peter Drucker, Austrian-American management consultant once famously quipped that “time is the scarcest resource, and unless it is managed, nothing else is managed.” All the gold, ivory, salt, and buildings in Timbuktu couldn’t buy Musa more time with his family, more youth, or another year of life (if those were things he wanted).

Choice

When we consider limited resources, we eventually wind up making a choice or series of choices. This is what affects our behaviour, making economics a social science because it’s the study of people and how they behave. Put simply, people will have endless wants, but they can’t have everything, so economics truly concerns itself with how we make those choices to direct/redirect/allocate what limited resources we have. For instance, in my life I’m a parent with two sons. Often when I’m looking at my personal budget (the tracking system I use to make sure I can afford the costs of my life and save for the future) I have to consider my money as a limited resource. I can only afford to put my sons into so many activities, buy them so many games/toys/clothes, take them to so many events/trips, etc., because I need to pay for other more critical things like food, shelter, utilities (power, water, gas), and so on.

As we start to look at these elements to consider and rank them it really helps to sort them into categories. Here are a few terms we’re going to be using very often through the course that you should familiarize yourself with:

• Resources

  These are goods used for trade, influence, or to produce other goods.

• Goods

  These are tangible physical objects such as a camera, a backpack, or a home. The size does not matter, but the rather the fact that it is a physical item.

• Services

  These refer to the intangible, things like labour (repairs, including intellectual labour such as consulting a lawyer), education, or insurance coverage.

• Needs

  These are absolute requirements for our own personal survival, or the survival of those dependent upon us. Food, water, shelter, etc.

• Wants

  These are more “nice to have” or optional things. Things which we do not absolutely require for our personal survival or the survival of our dependents. This would include things like gym memberships, cell phones, and massages.

  Opportunity Costs

So you’ve decided that you’re going to move ahead with your decision to purchase one of your “wants” and you’ve shifted it to the “need” column. It happens all the time! If you have happened about this website at any point, or have taken any of my other classes, you know that I’ve spent an entire other career in the photo/video industry - an industry where I spent a good amount of money on equipment like the H4n Pro recorder pictured here. I made the call that this recorder was more than just a want, but that I needed it to achieve the results I was required to achieve for jobs I deployed on, or was otherwise employed to do.

However, when I committed the hundreds of dollars I did to purchasing that unit, I effectively stopped myself from applying that money towards something else. Perhaps I might have invested that money in something which would have landed me a better paying contract, paid for a course which would have earned me a certification or a valuable networking opportunity, or even a winning lottery ticket (…not likely). Each of those things that I specifically DIDN’T do represents an opportunity cost. An opportunity cost is the value of the option(s) which you forego by selecting the choice which you do.

It should be mentioned that not every scenario is all or nothing! I may not have to buy the most expensive recorder, or the most expensive certification. Maybe I might choose to ration my resource and choose a cheaper recording device and a less expensive certification or simply a course. These decisions are all a part of economics.

Scarcity

When the market demands more than is being supplied, this is a situation referred to as: Scarcity. Effectively, if it carries a cost then you can consider it scarce. However, it does get a bit tricky to understand when you consider things like spring water - but that’s something we’ll cover later on when we explore the units on marketing and supply chain management.

Further, when the consumer has paid for the item it becomes a rationed economic good.

UTILITY

This refers the joy/usefulness of the product or service. It’s generally (though not always) broken into two subcategories: 1. Marginal Utility, and 2. Total Utility. The Total Utility refers to some quantified measure of satisfaction gained from the product or service being rendered, used, or consumed. The Marginal Utility refers to any extra quantifiable excess amount of satisfaction gained from another standardized unit of that same product or service being rendered, used, or consumed.

Assignment

Take some time and analyze some of the key focuses of your life. Perhaps you’re into playing an instrument, maybe you participate in a sport or activity, or you purchase books or some other hobby. Make a list of five products or services you routinely invest in and explore them relative to the concepts we’ve just established. What are the opportunity costs of buying the book? What are the alternatives to a membership at the gym? What is the utility and how might marginal utility be measured?

We will collectively discuss our lists as a class at the end and introduce a concept known as the Law of Diminishing Returns.