What this lesson teaches
I can explain why scarcity forces people, firms and governments to choose how resources are used.
Syllabus 8843, 1.1.1(b). Scarcity, choice and resource allocation: Scarcity implies that choices have to be made in the allocation of resources between different uses
I can describe how people and firms gather information, weigh costs and benefits, and review choices and their side effects.
Syllabus 8843, 1.1.2(b). Decision-Making Process of Economic Agents: In the pursuit of their objectives, economic agents gather information, weigh benefits and costs, consider constraints and perspectives before making decisions. They take into account the intended and unintended consequences, and any changes occurring, before reviewing the decisions
Make a guess
A survey of 30 shoppers says most want a mall to add a cinema. What is the biggest problem with deciding from this survey alone?
- Shoppers tend to say what the mall wants to hear, so ignore it.
- It may not be feasible, and 30 shoppers may not represent everyone.
- No problem. Most people want it, so the mall should build it.
- Surveys matter for governments, not for firms deciding what to build.
Show the answer
It may not be feasible, and 30 shoppers may not represent everyone.
A good decision needs a feasible option and reliable information. Space, budget and a tiny sample can all change the answer.
Good decisions depend on what is feasible and on having reliable information.
Decisions are shaped by constraints: budgets, time, available land and the skills of workers. An option that breaks a constraint is not a real option.
Decisions also need information. Agents rarely know everything. They rely on forecasts, surveys and past experience, which can be wrong or incomplete.
Consumers often lack information about quality, which is why they rely on reviews and brand names.
In an exam, ask: what constraint limits this choice, and what extra information would change the decision?
- Constraints
- Budget, time, resources, skills.
- Information
- Often incomplete; forecasts can be wrong.
Worked example: Choosing a school activity
A school has one room and two teacher-hours next week. A study-skills workshop needs two teacher-hours. A practical course needs four. A survey of 20 club members prefers the practical course.
- Constraint: only two teacher-hours are available, so the practical course is not feasible next week.
- Information: the survey covers only 20 club members, not the whole school.
- Decision: run the workshop now, and plan the practical course for when more teacher-hours are free.
Watch out for this
The most popular option in a survey is always the right choice.
It may not be feasible, and the survey may not represent everyone affected.
Check your understanding
A family wants a bigger flat, but the monthly repayment would exceed its budget. What limits this choice?
- Opportunity cost.
- A budget constraint.
- A lack of information.
Show the answer
A budget constraint.
Right. The family cannot choose an option it cannot afford.