4.3 Microeconomics Module.docx - 4.3 MICROECONOMICS Section 1 Scarcity Choice Opportunity Cost Note Due to their importance in both fields of economics

4.3 Microeconomics Module.docx - 4.3 MICROECONOMICS Section...

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4.3 MICROECONOMICS Section 1 Scarcity, Choice, & Opportunity Cost Note: Due to their importance in both fields of economics, the Scarcity, Choice, & Opportunity Cost section and the Supply & Demand section are covered in both the microeconomics and the macroeconomics courses. However, the examples used are different for each course and so are the test questions. So, if you are seeing the material for a second time, you will see the same principles discussed but within the context of the particular course. Next Page Scarcity Scarcity refers to the limited nature of society’s resources. People have unlimited wants and needs but there are limited resources so all human demands cannot be satisfied. Scarcity limits us both as individuals and as a society. As individuals, limited income (and time and ability) keep us from having and doing everything we would like. As a society, limited resources (such as manpower, machinery, and natural resources) constrain the amount of goods and services that can be produced. Next Page
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Choice Scarcity requires choice . Choice refers to people having to choose which of their desires they will satisfy and which they will leave unsatisfied. When we, either as individuals or as a society, choose more of something, scarcity forces us to have less of something else. Next Page Trade-offs All decisions that people make involve trade-offs of one goal against another. To get one thing that we like, we usually have to give up another thing that we also like. Examples: Going to movie night before your final exam leaves less time for a college student to study. Having more money to buy stuff requires working longer hours, which leaves less time for family and relaxation. Next Page People Face Tradeoffs Society faces an important tradeoff in efficiency vs. equality .
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Efficiency is when society gets the most from its scarce resources. Equality is when prosperity is distributed uniformly among society’s members. The tradeoff is that to achieve greater equality by redistributing income from higher wage earners to the poor. But this redistribution reduces the incentive to work and produce, and it shrinks the size of economic prosperity. Note: The redistribution of income from the wage earners to poorer people is accomplished through a progressive tax system and well-defined social programs like food stamps and unemployment insurance that try to provide a safety net for people at the low end of the income distribution. But, a progressive tax system reduces the incentive to work. The reward for working hard is a high income. Taxes reduce this reward and therefore reduce the incentive to work hard. Next Page Example Problem 1 Trade-offs John is an athlete. He has $120 to spend and wants to buy either a heart rate monitor or new running shoes. Both the heart rate monitor and running shoes cost $120, so he can only buy one.
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