A Level Economics 2: Scarcity, Choice and Opportunity Cost

Why is it necessary for all economies to make decisions regarding what, how, and for whom to produce, and what is the distinction between economic goods and free goods?

It is necessary for all economies to make decisions about what, how, and for whom to produce because resources are limited, but people's wants and needs are unlimited. Let's break down each aspect:

1. What to produce: Every economy needs to decide what goods and services to produce based on the preferences and demands of its population. Different societies have different priorities and desires. For example, a country with a large agricultural sector may prioritize producing crops and livestock, while a country with a strong manufacturing industry may focus on producing automobiles and machinery.

2. How to produce: Economies also need to determine how to produce goods and services efficiently. This involves making choices about which production methods, technologies, and resources to use. For instance, a company may decide to adopt automated machinery to increase productivity, while another may choose to rely on human labor-intensive processes.

3. For whom to produce: Another crucial decision is determining who will benefit from the produced goods and services. Resources are limited, and not everyone can have everything they want. Societies must decide how to distribute the available resources among their population. This may involve considering factors such as income levels, needs, or specific social policies.

Now, let's understand the distinction between economic goods and free goods:

• Economic goods: These are goods that are limited in supply and have value in the market. They are produced through the use of scarce resources and require efforts to obtain them. Examples include food, clothing, cars, smartphones, and furniture. Economic goods often involve a cost or price because they are scarce, and people have to make choices to acquire them.

• Free goods: Free goods are those that are abundantly available and do not have a price attached to them. They are not scarce and can be obtained without any direct cost. Examples of free goods are air, sunlight, and natural resources like wind and sea water. Since these goods are not limited in quantity, they do not require economic decision-making for their allocation.

Understanding the distinction between economic goods and free goods helps us recognize that not everything we want or need is freely available. Economic goods require decisions and trade-offs due to their scarcity, whereas free goods are accessible to all without a price or limitation.

In summary, all economies need to make decisions about what, how, and for whom to produce due to the scarcity of resources. Economic goods, which are limited and have value, require economic decision-making, while free goods, which are abundant and freely available, do not.

A Level Economics 1: Scarcity, Choice, and Opportunity Cost:

Scarcity: Scarcity refers to the limited availability of resources compared to the unlimited wants and needs of individuals, society, and the government. It is a fundamental concept in economics that recognizes that resources are finite, and there is not enough to satisfy all desires fully. Scarcity exists because our resources, such as time, money, natural resources, and labor, are limited. This scarcity creates the need to make choices and trade-offs.

Example: Imagine a small island with a limited amount of fertile land for farming. The islanders want to grow both wheat and corn, but the available land is only enough to produce one crop efficiently. The scarcity of land forces them to choose between growing wheat or corn.

Choice: Choice is the process of selecting one option from the available alternatives. It arises due to scarcity, as individuals, society, and the government must make decisions about how to allocate limited resources to satisfy their needs and wants. Choices involve evaluating and comparing the benefits and costs of different options.

Example: Suppose an individual has $100 and must decide between buying a new video game or saving the money for a vacation. They have to weigh the enjoyment they would get from the video game against the satisfaction of going on a vacation and choose the option that they value more.

Opportunity Cost: Opportunity cost is the value of the next best alternative that must be given up when making a choice. It represents the benefits or opportunities foregone by choosing one option over another. Whenever a choice is made, the opportunity cost is the value of the alternative that could have been chosen but wasn't.

Example: Let's say a student has a free evening and can either spend it studying or watching a movie with friends. If the student chooses to watch the movie, the opportunity cost is the time they could have spent studying and potentially improving their grades.

In summary, scarcity refers to the limited availability of resources, choice is the process of selecting among alternatives, and opportunity cost represents the value of the best alternative forgone. These concepts apply to individuals, society, and the government when they need to make decisions about resource allocation in the face of scarcity. Understanding these concepts helps in making informed choices and understanding the trade-offs involved in decision-making.

Economics Essay 87: PPF and the Fundamental Economic Problem

Explain how a production possibility diagram can be used to illustrate some features of the fundamental economic problem.

A production possibility diagram, also known as a production possibility frontier (PPF), is a graphical representation that illustrates the trade-offs and constraints faced by an economy in producing different combinations of goods or services. It shows the maximum output levels that can be achieved given the available resources and technology.

The fundamental economic problem refers to the scarcity of resources relative to unlimited human wants. It is the problem of allocating limited resources to produce goods and services in the most efficient and effective manner. The production possibility diagram helps in understanding this problem in the following ways:

1. Scarcity: The production possibility diagram visually depicts the scarcity of resources. It shows the limited availability of factors of production, such as labor, capital, and natural resources, which restricts the economy's ability to produce an infinite quantity of goods and services. The curve of the PPF represents the boundary of the economy's production capacity.

2. Opportunity Cost: The production possibility diagram illustrates the concept of opportunity cost. The curve of the PPF represents the different combinations of goods that can be produced. As the economy moves along the curve to produce more of one good, it must give up the production of some of the other goods. This trade-off is represented by the concept of opportunity cost. The slope of the PPF reflects the opportunity cost of producing one good in terms of the quantity of the other good that must be sacrificed.

3. Efficiency: The production possibility diagram shows the efficient use of resources. Points on the curve of the PPF represent efficient allocation of resources where the economy is producing the maximum possible output given its resources and technology. Points inside the curve indicate an inefficient allocation of resources, as the economy is not fully utilizing its available resources.

4. Economic Growth: The production possibility diagram also demonstrates the concept of economic growth. If an economy experiences an increase in its resource base or improves its technology, the PPF will shift outward, indicating an expansion of production possibilities. This reflects an increase in the economy's capacity to produce more goods and services over time.

In summary, the production possibility diagram is a useful tool to illustrate the fundamental economic problem of scarcity and the trade-offs involved in resource allocation. It shows the constraints faced by an economy, the concept of opportunity cost, the efficient use of resources, and the potential for economic growth.

Utopian thinking: the easy way to eradicate poverty

Rutger Bregman in The Guardian

Why do poor people make so many bad decisions? It’s a harsh question, but look at the data: poor people borrow more, save less, smoke more, exercise less, drink more and eat less healthily. Why?

Margaret Thatcher once called poverty a “personality defect”. Though not many would go quite so far, the view that there’s something wrong with poor people is not exceptional. To be honest, it was how I thought for a long time. It was only a few years ago that I discovered that everything I thought I knew about poverty was wrong.

It all started when I accidently stumbled on a paper by a few American psychologists. They had travelled 8,000 miles, to India, to carry out an experiment with sugar cane farmers. These farmers collect about 60% of their annual income all at once, right after the harvest. This means they are relatively poor one part of the year and rich the other. The researchers asked the farmers to do an IQ test before and after the harvest. What they discovered blew my mind. The farmers scored much worse on the tests before the harvest. The effects of living in poverty, it turns out, correspond to losing 14 points of IQ. That’s comparable to losing a night’s sleep, or the effects of alcoholism.

A few months later I discussed the theory with Eldar Shafir, a professor of behavioural science and public policy at Princeton University and one of the authors of this study. The reason, put simply: it’s the context, stupid. People behave differently when they perceive a thing to be scarce. What that thing is doesn’t much matter; whether it’s time, money or food, it all contributes to a “scarcity mentality”. This narrows your focus to your immediate deficiency. The long-term perspective goes out of the window. Poor people aren’t making dumb decisions because they are dumb, but because they’re living in a context in which anyone would make dumb decisions.

 ‘Indian sugar cane farmers scored much worse on IQ tests before the harvest than after.’ Photograph: Ajay Verma/REUTERS

Suddenly the reason so many of our anti-poverty programmes don’t work becomes clear. Investments in education, for example, are often completely useless. A recent analysis of 201 studies on the effectiveness of money management training came to the conclusion that it makes almost no difference at all. Poor people might come out wiser, but it’s not enough. As Shafir said: “It’s like teaching someone to swim and then throwing them in a stormy sea.”

So what can be done? Modern economists have a few solutions. We could make the paperwork easier, or send people a text message to remind them of their bills. These “nudges” are hugely popular with modern politicians, because they cost next to nothing. They are a symbol of this era, in which we so often treat the symptoms but ignore the causes.

I asked Shafir: “Why keep tinkering around the edges rather than just handing out more resources?” “You mean just hand out more money? Sure, that would be great,” he said. “But given the evident limitations … the brand of leftwing politics you have in Amsterdam doesn’t even exist in the States.”

But is this really an old-fashioned, leftist idea? I remembered reading about an old plan, something that has been proposed by some of history’s leading thinkers. Thomas More hinted at it in Utopia, more than 500 years ago. And its proponents have spanned the spectrum from the left to the right, from the civil rights campaigner Martin Luther King to the economist Milton Friedman.
It’s an incredibly simple idea: universal basic income – a monthly allowance of enough to pay for your basic needs: food, shelter, education. And it’s completely unconditional: not a favour, but a right.

But could it really be that simple? In the three years that followed, I read all I could find about basic income. I researched dozens of experiments that have been conducted across the globe. And it didn’t take long before I stumbled upon the story of a town that had done it, had eradicated poverty – after which nearly everyone forgot about it.

‘Everybody in Dauphin was guaranteed a basic income ensuring that no one fell below the poverty line.’ Photograph: Barrett & MacKay/Getty Images/All Canada Photos

This story starts in Winnipeg, Canada. Imagine a warehouse attic where nearly 2,000 boxes lie gathering dust. They are filled with data – graphs, tables, interviews – about one of the most fascinating social experiments ever conducted. Evelyn Forget, an economics professor at the University of Manitoba, first heard about the records in 2009. Stepping into the attic, she could hardly believe her eyes. It was a treasure trove of information on basic income.

The experiment had started in Dauphin, a town north-west of Winnipeg, in 1974. Everybody was guaranteed a basic income ensuring that no one fell below the poverty line. And for four years, all went well. But then a conservative government was voted into power. The new Canadian cabinet saw little point in the expensive experiment. So when it became clear there was no money left for an analysis of the results, the researchers decided to pack their files away. In 2,000 boxes.

When Forget found them, 30 years later, no one knew what, if anything, the experiment had demonstrated. For three years she subjected the data to all manner of statistical analysis. And no matter what she tried, the results were the same every time. The experiment – the longest and best of its kind – had been a resounding success.

Forget discovered that the people in Dauphin had not only become richer, but also smarter and healthier. The school performance of children improved substantially. The hospitalisation rate decreased by as much as 8.5%. Domestic violence was also down, as were mental health complaints. And people didn’t quit their jobs – the only ones who worked a little less were new mothers and students, who stayed in school longer.


The great thing about money is that people can use it to buy things they need, instead of things experts think they need

So here’s what I’ve learned. When it comes to poverty, we should stop pretending to know better than poor people. The great thing about money is that people can use it to buy things they need instead of things self-appointed experts think they need. Imagine how many brilliant would-be entrepreneurs, scientists and writers are now withering away in scarcity. Imagine how much energy and talent we would unleash if we got rid of poverty once and for all.
While it won’t solve all the world’s ills – and ideas such as a rent cap and more social housing are necessary in places where housing is scarce – a basic income would work like venture capital for the people. We can’t afford not to do it – poverty is hugely expensive. The costs of child poverty in the US are estimated at $500bn (£410bn) each year, in terms of higher healthcare spending, less education and more crime. It’s an incredible waste of potential. It would cost just $175bn, a quarter of the country’s current military budget, to do what Dauphin did long ago: eradicate poverty.

That should be our goal. The time for small thoughts and little nudges is past. The time has come for new, radical ideas. If this sounds utopian to you, then remember that every milestone of civilisation – the end of slavery, democracy, equal rights for men and women – was once a utopian fantasy too.

We’ve got the research, we’ve got the evidence, and we’ve got the means. Now, 500 years after Thomas More first wrote about basic income, we need to update our worldview. Poverty is not a lack of character. Poverty is a lack of cash.

Cricket - How scarcity affects sportsmen

Like elsewhere in life, in sport too, deprivation makes people anxious and one-eyed, leading to mistakes and failure

Ed Smith in Cricinfo

September 18, 2013

	When you are desperate to succeed, you are so preoccupied with scoring runs that you attend less fully to watching and reacting to the ball © Getty Images  Enlarge

When you are starving, it is hard even to imagine being released from the ache of hunger. When you're shivering in a snowstorm, it is difficult to remember that one day, once again, you will feel the warmth of the summer sun on your face. Deprivation is not just a physical state; it also diminishes your psychological and imaginative capacity. All cricketers, even the great ones, understand this from personal experience. Bad form messes with your mind.

The striking thing about bad form is how it can poison a player's personality as well as his game. I played with one batsman who, if he was already out, would take every subsequent play-and-miss by a team-mate as a personal affront. "Look at him, playing and missing," he would mutter, "I must have used up all the bad luck earlier on." Even though his batting was no longer relevant to the innings, he was unable to separate his own narrow struggle for runs from the wider experience of watching someone else bat. His own scarcity of runs was so prominent at the front of his mind that he couldn't see around it.

Desperation born of scarcity also explains why batsmen play so weirdly when they are out of form. We have all seen out-of-form batsmen, searching to get off the mark, imagine scoring opportunities that weren't, in fact, ever there. When a struggling batsman plays across the line and gets lbw, it's often because he convinced himself that the ball was missing leg stump, and hence invited an easy scoring shot, when in fact it was always going straight at the stumps. Anxious hopefulness and harsh reality become confused in the batsman's mind - which explains why so many awkward conversations in the dressing room begin with the plaintive question, "That was missing leg, wasn't it?" (Translation: "Tell me that was missing leg!")

Social scientists have long understood the effect of scarcity on behaviour. During the Second World War, a group of conscientious objectors agreed to participate in a study on starvation at the University of Minnesota. Thirty-six healthy men lived in a controlled environment where their calorie intake was reduced to the point where they were eating just enough food that they didn't permanently damage their health. The physical results were graphic and extreme. Subjects lost so much weight that even sitting down became painful - they had to use pillows.

More relevant from a sporting perspective is how hunger affected the subjects' minds. One participant recalled what depressed him most about the experience: "It wasn't so much because of the physical discomfort, but because it made food the most important thing in one's life… food became the one central and only thing really in one's life. And life is pretty dull if that's the only thing. I mean, if you went to a movie, you weren't particularly interested in the love scenes, but you noticed every time they ate and what they ate." Scarcity had captured their minds to the point where they were overwhelmed by it. It changed the way they thought about everything else.

	Mental strength, Steve Waugh once told me, is about behaving the same way in everything you do at the crease, no matter how badly you're playing

Starvation may sound like an extreme way of making a simple point. But a more recent study shows that mere routine hunger also affects how people go about straightforward activities. One experiment compared the responses of one group of dieters and another group of non-dieters to a simple task. The subjects simply had to push a button when they saw a red dot on the screen. Sometimes, just before the dot appeared, another picture would flash on the screen. For non-dieters, this picture did not influence their ability to see the red dot. But for dieters, they were less likely to see the red dot if they had just seen a picture of food. So flashing the image of a piece of cake, for example, significantly lowered the dieters' chances of noticing the red dot immediately afterwards. The cake, in effect, blinded them. The title of the study captures the point: "All I Saw Was the Cake."

Both these examples are drawn from the thoughtful new book Scarcity, by the Harvard economist Sendhil Mullainathan and the Princeton psychologist Eldar Shafir. Sport is not the focus of their book; it gets only two pages. But non-sports books have often helped me reflect on the experience of playing sport. Nassim Taleb'sFooled by Randomness taught me more about cricket than almost any other book - yet cricket is not mentioned, and Taleb hates organised sports.

In the same way, Scarcity provided brilliant scientific footnotes to an experience I remember only too well: being out of form, suffering from a scarcity of runs, feeling consumed by a craving for something I lacked. As the authors put it: "Because we are preoccupied by scarcity, because our minds constantly return to it, we have less mind to give to the rest of life." In cricketing terms: when you are desperate to succeed, you are so preoccupied with scoring runs that you attend less fully to watching and reacting to the ball.

The authors add: "We can measure fluid intelligence, a key resource that affects how we process information and make decisions. We can measure executive control, a key resource that affects how impulsively we behave. And we find that scarcity reduces all these components of bandwidth [or mental capacity] - it makes us less insightful, less forward-thinking, less controlled."

Exactly. It makes us more likely to get lbw. At an extreme, this process becomes choking, when the experience of scarcity is so dominant that athletes are unable to perform even perfunctory, routine tasks.

So how can sportsmen get out of the downward spiral of scarcity leading to still more scarcity? I've long suspected that the best players are often the best actors. They are able to project an aura of confidence - abundance, if you prefer - even when times are hard. This confidence trick is only partly about fooling the opposition. More importantly, it is also about fooling yourself. Mental strength, Steve Waugh once told me, is about behaving the same way in everything you do at the crease, no matter how badly you're playing.

The strongest competitors are better equipped at superimposing a better alternative reality that replaces the facts as everyone else perceives them. When Novak Djokovic is drawing away to victory, he hums his favourite piece of classical music to himself. The tune and the experience of victory have become intertwined. So he now hums the same tune when he is struggling at the start of a match - it helps him auto-correct towards confident, winning ways.

Hope, optimism, belief - call it what you will. Perhaps it is simply the ability to conjure the feeling of afternoon sunshine on your face while striding into the teeth of a winter gale
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