Definition of Principle
What This Really Means
Real World Application
1 Scarcity Forces Tradeoffs
Scarcity, the idea that there is not enough of everything to satisfy everyone; causes us to make choices. In making these choices we are doing a tradeoff, or giving up one item for another item we want even more. We do an opportunity cost to decide what is more important to us.
It really means that we cannot always get what we want. We have to make choices and decide what is important to us.
I’m a soccer player and I have two D1 colleges, Colorado State University and University of Arizona, that are offering me scholarships. One is offering me more money but the other has the better degree program. I have a scarcity, I cannot go to both colleges, so I have to make a tradeoff, money vs degree program.
1) I go to the school that offers me more money and not get as in-depth of knowledge for my degree. Potentially not getting as good of a job.
2) I bargain with the school that has the better degree program and risk losing scholarship funding all together.
A student has just graduated high school and is looking for a job. However, they cannot decide if it is worth getting a job while trying to study for their degree. The scarcity is time, if they have a job and are working towards their degree. Will they be able to graduate?
1) The student gets a job and only work part time risking the chance of losing class credit
2) The student does not get a job, focus on their studies, and worry about paying off their student loans after they graduate.
2 Costs vs. Benefits
Examining the costs, the amount of resources it takes, vs the benefit, the gain from making one choice over another, is called a cost-benefit analysis.
It means people will chose the alternatives that they see as having the greatest benefits at the least costs.
1. Costs: not as good of an education less chance of getting a job
More scholarship money
Less dept coming out of college
More time for soccer
Graduate in 4 years instead of 6
Less scholarship money
More academic rigor
Potential to loss scholarship
Less time for soccer
More dept to pay off
Graduate in 6 years
Better academic understanding
More likely to get a job straight out of college
Teaches time management skills
3 People Think at the Margin
People make incremental decisions, a decision that is not all or nothing: a marginal decision. In making decisions at the margin people look at the marginal costs vs. marginal benefits.
People look at what they gave up to add the one extra unit vs. what they gained from that unit.
What kind of job I can now get
What degree I end up studying
How I manage my time between academics and athletics
4 Incentives Matter
Benefits are like incentives that help us make our choice. Some are positive and some are negative, either way incentives drive our decisions.
Incentives are rewards or punishments that influence your decision
Less academic rigor
Better soccer program
Ability to get a good job
More degree related job opportunities in the area
Farther away from home
The climate of the location
No skiing or mountains
Pay Out-of-State Tuition
5 Trade Makes People Better Off
We figure out what we are good at and concentrate our efforts in that area or work specialize. In doing so, we