Hello, I am Dr. Q, welcome to my channel.
This is the first class of Principles of Economics,
if you have zero to little knowledge about
economics, this will be a great start. In
this class, I will explain scarcity and opportunity
cost in depth, and summarize the definition
for economics. Please subscribe my channel
if you are interested in learning more about
economics.
What is Economics and why is it important
to learn Economics?
There are 3 key words for the answers to the
questions. They are Limits, Alternatives,
and Choices.
When you come across the word Limits in daily
life, what do you think of? We may think of
boundaries, restrictions, a point or a level
we cannot pass, and there are something we
can and we cannot do.
Then, when you come across the word Alternatives,
what do you think of? We may think of possibilities
or options.
The last word Choices refer to making a decision.
The three words compose the gist of Economics.
● Economics is the social science of how
social identities make optimal decisions in
the face of scarcity. These can be individual
decisions, family decisions, business decisions
or societal decisions.
So, Economics is a social science, as opposed
to natural science, such as physics or biology.
It studies social identities, such as individual
consumers, households, businesses/firms or
societies. It's established to help them to
make decisions, because our wants are unlimited,
while the means to satisfy the wants are limited.
I will discuss the meaning of “optimal decision”
later and focus on scarcity for now.
What is the meaning of scarcity? It means
a thing is limited in quantity or quality,
therefore, costly to acquire, and it has to
be desirable. Desirable means people want
it. Trash, debt, air pollutants, embarrassments
are undesirable and therefore, not scarce.
Food, shelter, education, amenities, natural
resources, educated labor, machines, friendship,
valuable time shared with loved ones, are
desirable and might be costly to acquire,
therefore, they are scarce.
And scarcity is a comparative term. Even free
natural resources can become scarce if costs
arise in obtaining or consuming them. Clean
air and drinkable water might not be scarce
in majority part of the United States, but
can be very scarce in certain regions of the
world. Diamonds might not be considered as
scarce in the Middle Ages, but they surely
are now after centuries of education by jewelers
like DeBeers to consumers. Hand sanitizers,
facial masks, gloves and many other Personal
Protective Equipment were not as scarce before
the pandemic, but they surely are very scarce
during the outbreak of COVID 19.
Because time is limited and scarce, when you
choose to watch my video and learn economics,
you automatically give up other options like
working out, hanging out with friends, reading
a book, running chores, or studying something
else. Because the production capacity and
resources are limited for a business or a
firm, when they choose to produce a combination
of goods and services, they give up other
options that might be profitable. When the
tax revenue is fixed during a financial year,
the government has to identify where additional
spending could do the most good and where
reduction in spending would do the least harm.
You can find the budget summary at the White
House website, for example, the year 2020
one looks like this: https://www.whitehouse.gov/wp-content/uploads/2020/02/budget_fy21.pdf,
we can see that the government made some choices
in cutting spending and allocate the resources
among health care, welfare reform, environmental
problems, social defense and many other items.
Therefore, because of scarcity, we have to
pick and choose, when choosing one item or
activity, we simultaneously give up other
options, that is the reason of having Opportunity
Cost
We hear the phrase “there is no free lunch”
a lot, we have an intuitive idea about everything
comes with a price. It is reasonable to refer
to the opportunity cost as the price in plenty
of occasions, however, in economics, we need
to have a thorough and deep understanding
about the definition of cost, because it defines
the decision making procedure.
So now, instead of thinking about the price
tag or dollar sign like any adult, we need
to view the cost through the eyes of a small
child. Let’s say, a 5 year old little girl,
her name is Harper. Harper receives $ 60 gift
certificate from her parents at Christmas
to be used at toys store. So one day, Harper’s
grandma takes Harper to the store, Harper
is so happy to see so many toys and she just
wants them all. But after gaining a bit of
sense of affordability, Harper narrows down
to stuffed animals at $20 per piece and picture
books at $10 per piece. The grandma tells
her that if she spends all her money, she
can get 3 stuffed animals, or 6 books, or
a limited combination of both. And Harper
made her decision of getting 1 stuffed animal
at $20 per piece and 4 books at $10 each.
By doing so, Harper exhausts the budget. But
while waiting to pay, Harper tells her grandma
that “the stuffed animal is so cute, I just
want another one”, her grandma responds
that “You can pick another stuffed animal,
but you have to return two of the four books
you picked”. And Harper makes the exchange.
So, from an adult’s perspective, the second
stuffed animal costs $20 but in the eyes of
the child, it costs two picture books. And
Harper’s understanding about cost is the
one of fundamental ideas in economics.
Now, let’s think about another practical
question: What is the cost of going to college
as a full time student for a year? Well, it
depends on the next best alternative one has.
Actually, in order to answer the questions
in regards to the cost, the first thing you
need to consider is, what are the options?
Let’s pull the summary of annual costs from
North Carolina State University, the largest
university in the Carolinas. The in-state
and out-of-state tuition and fees are different
while the rest of the items are the same.
Let’s say, we definitely want to include
the tuition and fees, books and supplies,
and housing into the cost of going to college.
We don’t really want to include meals into
the cost. Why? Because meals cost is not generated
specifically by going to college. You have
to eat no matter what you do. The expense
on meals may vary with respect to what you
do, but generally speaking, there is food
cost no matter what. Here, for the simplicity
of calculation, we just do not include it
as college specific cost. The same rational
applies to personal expenses and transportation.
For loan fee, it’s only applicable to a
group of students so we do not include it
either. So, the instate explicit cost is a
bit of shy of $17,000 while the out-of-state
explicit cost is a bit of higher than $37,000.
And what’s the meaning of explicit cost?
We will talk more about it in firm theory
but explicit here means obvious, it is obvious
to see this type of cost as you can see your
money go out of your pocket/bank account and
get into the university’s.
Next, let’s say, what else are you losing
by going to college? To rephrase that, if
you did not go to college as a full time student,
what would you do? The answers may vary from
person to person but it’s safe to guess
that one may take a job, one may enlist in
military or go travelling. Let’s assume
the single next best alternative, means the
alternative that brings you the most value
if you do not go to college, is working. On
average, the high school diploma could earn
you $30,000. But by going to college as a
full time student, you automatically give
up this earning, and this is also the cost.
And this type of cost is not so obvious, so
it’s called implicit cost. In sum, going
to college as a full time student costs one
about $47,000 for instate and $67,000 for
out-of-state.
Now, think about what is the cost of going
to college for Katie Ledecky? If she didn’t
go to Stanford, she would have gotten 5 million
per year in endorsements. Apparently, she
values the college more and she went to Stanford.
But for some entrepreneurs, like Bill Gates,
Mark Zuckerberg, Elizabeth Holmes thinks the
opportunity cost of going to college is too
high, and they dropped out.
Now, let’s think about the opportunity cost
in perspective of a firm. For example, let’s
assume I own a factory, assembling computers
for profit. In this factory, I have some spare
space. This space is not used for anything,
just there collecting dust. My question is,
what is the Opportunity Costs of leaving portion
of factory unused? Again, the first thing
you need to ask me is, what are the alternative
options? Can you utilize the space anyhow?
If I can rent the space out, and collect $2,000
per month as rent, then the O.C. of leaving
the space unused is $2,000. If renting is
not an option, but I can assemble more computers
and get $1,000 extra profit monthly, then
the O.C. is $1,000. If there is absolute nothing
I can do to utilize the space, then the O.C.
of leaving it unused is ZERO.
In sum, when making a decision, the social
identity wants to minimize the opportunity
cost, and make a decision to maximize the
value.
That’s all I have for this video, I will
further discuss how to make optimal decision
as a rational person in next one.
Thank you for watching. Please like or share
the video, and subscribe my channel for more
lectures in economics.
