Page 134 - ABCTE Study Guide_Neat

Scarcity means not having enough resources to fulfill demand. Scarcity of product is usually beneficial to
the producers of goods, such as businesses. In times of extreme scarcity, the government must often step
in and see that no one business holds dramatic dominance of the supply and therefore the
market. Opportunity costis another important economic concept; it is less concrete than the concept of
scarcity. Whenever a decision is made, there are two costs involved: the direct value of making the
decision and the opportunity cost of not being able to make a different decision.

For instance, the opportunity cost to a city of building a hospital on a certain plot of land would be the
potential profit from building a factory, or the various other benefits that the citizens would reap if the
structure were to become a repair shop or an employment agency. If a decision strongly benefits too few
entities within a system or takes too much away from too many, the opportunity cost of that decision is too
high. Regulators must step in to ensure a less extreme decision.

Economics is a field filled with theorists and their ideas. See below to learn more about one of them, the
“parable of the broken window.”

French economist Frédéric Bastiat composed the parable of the broken window in his 1950 essay That
Which is Seen and That Which is Not Seen. In consoling a shopkeeper whose son has just broken the
shop’s window, the onlookers say, "It is an ill wind that blows nobody good. Everybody must live, and
what would become of the glaziers if panes of glass were never broken?"

They theorize that the broken window is actually beneficial to the whole town, as the glazier earns money
and then spends it on bread. The baker benefits and spends his earnings at the cobbler’s and so on.
However, as Bastiat points out, the townspeople aren’t considering the hidden costs, that is, what the
shopkeeper can no longer purchase due to window repair fee.

Another economic concept that has great effect on decisions in any economic system is the concept
of trade-off. In order to increase one aspect of an economic system, another must often be decreased or
neglected. Trade-offs such as efficiency for labor cost, quantity for quality, and energy supply for
environmental solidity are common. The concept of trade-offs is related to opportunity cost. Whenever the
trade-off is too heavily weighted on one side against the equilibrium of the system, amendments to the
decision must be made to see that equilibrium is maintained.

Spending, saving, and investing are important components of an economy. Spending means the
acquisition of commodities, but it also means the consumer has less currency. Saving means the
consumer keeps his currency, but whatever the consumer could have bought remains on the shelf.
Investing is a less cut-and-dry proposition; investing means that the consumer has less money and
no commodity to show for his money, but that in the future, the consumer hopes to have more money for
having invested the money that he did. It would not be a stretch to say that the commodity purchased in
an investment is the commodity of earning potential.

Modern economies, more often than not, feature the possibility of credit. It is important for the consumer
to be careful when spending money that he does not have. If he has a good record of handling credit, the
consumer is more likely to be extended credit in the future, but his privilege of credit may be revoked all
together if his record is bad.

Commodity-producing businesses need employees to help keep them running. The factors of production,
and, subsequently, the wages of employees, are determined in much the same way as prices on the
market—with the laws of supply and demand. When demand is great for a product that any certain
business is pumping out, that business is required to increase production and therefore raise the amount
of money spent on wages (this is an example of a trade-off—quantity for labor cost). Should there be a
glut of supply for the product that any certain business produces, production, wages, and sometimes the