Key Terms
• Exchange
• Money prices
• Transaction costs
• Specialization
• Property rights
• Market-clearing price
• Interdependence
• Monetary costs
• Non-monetary costs
Lesson Objectives
1. Review the nature of voluntary exchange, drawing on the experiences in "Why People Trade."
o No one forced people to trade; why did they? (anticipation of benefit)
o Who benefited from each exchange? (mutual benefit)
o Why were some people able to trade more than others?
o What was the opportunity cost of the trade you made?
2. Define market - and discuss why they are our preferred method of rationing. (Relate to "Why People Trade" - was that a market? how so?)
o How do people behave in markets?
o Markets work as positive sum games when:
there are clearly defined "rules of the game;"
property rights are clearly established and are protected; and
there is freedom to exchange.
o How would our market have been different if we had used money?
3. Define incentives as both rewards and penalties for behavior.
o There are monetary and non-monetary incentives.
4. The role of prices in markets.
o Prices provide information.
o Prices act as a rationing mechanism.
o Prices are incentives - for buyers and sellers.
5. Prices play a crucial coordinating role in commercial societies; they provide incentives for buyers and sellers to act in ways that lessen the impact of scarcity.
o Reminder of law of demand from first lesson. How do buyers react to changing prices?
o Reminder of law of supply from first lesson. How do sellers react to changing prices?
Definitions
Exchange - Trade; voluntary agreements between buyers and sellers.
Market clearing price - The price at which all that suppliers are willing to sell equals all that buyers are willing to purchase; the price at which quantity demanded equals quantity supplied.
Non-monetary costs - See transaction costs.
Property rights - The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.
Specialization - Occurs when individuals, businesses, regions or nations concentrate on producing only those goods and services that they can best (most efficiently) produce, given their existing resources.
Transaction costs - The resources (like time and energy) that are used in making an exchange. Examples of transaction costs are time spent shopping or the time and energy necessary to negotiate a contract.
Thursday, July 31, 2008
Scarcity and Choice
Key Terms
• Demand
• Supply
• Scarcity
• Trade-offs
• Opportunity Cost
• Marginal Costs/Benefits
Lesson Objectives
1. Define scarcity and give an example.
2. Establish causation: Scarcity necessitates choice; therefore trade-offs cannot be avoided.
o List and describe several methods of rationing.
3. Define opportunity cost.
o Differentiate between trade-off and opportunity cost: the cost is the "next-best" alternative.
4. Develop examples to illustrate the characteristics of cost.
o All costs lie in the future; the anticipation of future consequences shapes peoples' decisions.
o Emphasize that "consequence" and "opportunity cost" are different.
5. To the decision-maker, the relevant value of something is its marginal value.
o Define marginal as additional, or "a little more or a little less," or "the next unit."
Definitions
Demand - The relationship between prices and the corresponding quantities of goods or service buyers are willing to purchase at any given point in time.
Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.
Marginal cost - The increase in total cost that results from producing an additional unit.
Opportunity cost - The most highly valued sacrificed alternative; the value of the "next-best" choice.
Scarcity - Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost. Scarcity defines a relationship - between the amount of something we want and the amount that is available.
Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.
Trade-off - A choice between alternatives that reveals the opportunity cost of selecting one alternative over the other
• Demand
• Supply
• Scarcity
• Trade-offs
• Opportunity Cost
• Marginal Costs/Benefits
Lesson Objectives
1. Define scarcity and give an example.
2. Establish causation: Scarcity necessitates choice; therefore trade-offs cannot be avoided.
o List and describe several methods of rationing.
3. Define opportunity cost.
o Differentiate between trade-off and opportunity cost: the cost is the "next-best" alternative.
4. Develop examples to illustrate the characteristics of cost.
o All costs lie in the future; the anticipation of future consequences shapes peoples' decisions.
o Emphasize that "consequence" and "opportunity cost" are different.
5. To the decision-maker, the relevant value of something is its marginal value.
o Define marginal as additional, or "a little more or a little less," or "the next unit."
Definitions
Demand - The relationship between prices and the corresponding quantities of goods or service buyers are willing to purchase at any given point in time.
Marginal benefit - The increase in total benefit that results from producing, purchasing, or consuming an additional unit.
Marginal cost - The increase in total cost that results from producing an additional unit.
Opportunity cost - The most highly valued sacrificed alternative; the value of the "next-best" choice.
Scarcity - Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost. Scarcity defines a relationship - between the amount of something we want and the amount that is available.
Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.
Trade-off - A choice between alternatives that reveals the opportunity cost of selecting one alternative over the other
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