Creating A Budget

Scarcity

What Is Scarcity?

If something is scarce it will have value. Goods that are not scarce will have a lower market value. There are a finite (limited) number of workers, machines, factories, acres of land and reserves of oil on the planet.

There is also a limited pot of money available to governments to finance their spending priorities - the Government cannot raise taxes too much to fund health and education without affecting other areas of the economy.

Productive resources are limited. Therefore, people cannot have all the goods and services they want; as a result, they have to choose some things and give up others.

Click here and watch the video to learn more about Scarcity.

What Is Scarcity?

If something is scarce it will have value. Goods that are not scarce will have a lower market value.   There are a finite (limited) number of workers, machines, factories, acres of land and reserves of oil on the planet. 

There is also a limited pot of money available to governments to finance their spending priorities - the Government cannot raise taxes too much to fund health and education without affecting other areas of the economy.

Productive resources are limited. Therefore, people cannot have all the goods and services they want; as a result, they have to choose some things and give up others.

 

Click here and watch the video to learn more about Scarcity.

Wants and Needs

Welcome to Economics!  Much of what you learn in this class is already familiar to you.  Economics deals with how society and individuals get the most out of their resources.  When you borrow money to buy a new car, that is economic activity.  If you earn money working in a job, that is also economics.   People who set up businesses, governments that plan budgets, and even children saving money in a piggy bank are all engaging in economic activity.

Everyone has wants and needs.  Our economic wants are satisfied by consuming goods, services, or leisure activities, such as video games.  But human wants are unlimited. Whether it is a person struggling to feed herself in the developing world, or a millionaire seeking to increase her fortune in the USA, there is always something more an individual wants. Human beings want better food; housing, transport and health services.

But economic resources are limited. People have to make choices because they cannot have everything they want – having more of one thing normally means having less of something else. The development of society can be described as the emergence of new wants and needs - which producers attempt to supply by using the available factors of production. 

Herbert Hoover's Political Philosophy

Politically, Hoover identified as a moderate Republican in the mold of Theodore Roosevelt.  He revered the Constitution and values of the United States, and mistrusted imported ideologies, such as anarchism and communism.  Hoover felt the United States needed to provide a clear alternative to these new ideologies. He called it “American Individualism”.

Pres. Herbert Hoover

In American Individualism Hoover explained the philosophic, spiritual, economic, and political grounds of American Individualism. He defined American Individualism “as the source of human progress — that each individual shall be given the chance and stimulation for development of the best which he has been endowed in the heart and mind”.  Hoover championed the “equality of opportunity” — the idea that, in America, hard work can lead anyone with enough self-initiative to become successful and wealthy.


Seven months after Hoover was sworn in as President of the United States, the stock market collapsed, setting off the Great Depression.  At first Hoover expected the economy to recover largely on its own.  Hoover was opposed to “direct aid” from government to individuals.  He feared that federal aid might lead to dependence on the government and hurt the “rugged individualism” that was source of the American people’s moral strength.  He preferred for the federal government to provide relieve to private business, so that they might recover and rehire unemployed Americans.

But as the Depression continued to grow worse, Pres. Hoover did expand the role of the government to help the economy. Among his efforts to solve the depression were:

The Reconstruction Finance Corporation which funded loans to banks, railroads and insurance companies to prevent these companies from going bankrupt, which would, in Hoover's view, deepen the depression.

The Federal Home Loan Bank Act, which created Savings and Loan institutions to provide loans for home ownership.

The Emergency Relief and Construction Act, which authorized over one billion dollars in public works projects.

As the Depression dragged on (with unemployment reaching 25%), most Americans became increasingly disenchanted with Hoover.  Many felt that he was either unable or unwilling to take steps to rebuild the economy.  In 1932 Hoover was defeated by his Democratic opponent, Franklin D. Roosevelt, in a landslide election.  A significant marjority of Americans voters had rejected Hoover.

Variable/Fixed Cost Cartoon

Which entrepreneur (in Fig. 2-1) is in a better position to control fixed costs of production if there is a decline in the demand for bats-the entrepreneur with the automated bat-production machine or the entrepreneur who provides bats made by hand?

                                            Fig. 2-1

Fixed and Variable Costs

Anyone who runs a business knows that some costs have to be paid no matter how many products are sold. For example, Alex owns a shoe store. He must pay his property taxes whether he sells 20 or 200 pairs of shoes each day. Mortgage payments (payments on the loan he took out to buy his building) must be made to the bank. Fire insurance, the lease on a delivery truck, and installments on a remodeling loan are other examples of costs Alex must pay regardless of sales. Expenses that have to be paid no matter how many goods or services are offered for sale are called fixed costs.

Other types of costs change depending upon how many products are produced. These are called variable costs. Variable costs include the wages of workers or salespeople, raw materials, electric power to run machines, and the cost of maintaining inventory. If Alex decides to offer more types of shoes for sale, he will need to hire more people to stock and sell these items. Alex's inventory costs will grow as well as his shipping costs for any products that he either buys or sends to customers. These are all examples of variable costs. Entrepreneurs need to understand the important differences between fixed and variable costs and how these differences affect a firm's success. Fixed costs must be paid.

The only costs an entrepreneur has control over are variable costs. Alex may be required to pay rent for his shoe store, but he can choose how many salespeople to hire or how many products to stock. The fact that entrepreneurs can’t change their fixed costs at the present does not mean they should ignore them. Fixed costs are generally paid out of the money earned from an entrepreneur's sales. If the entrepreneur can sell more products to earn more money, the fixed costs will be a smaller part of income. This explains why most gas stations have become convenience stores. If the owner has to pay to have a building and someone there to help customers, it doesn't cost much more to sell milk and bread, too. As the result of selling other products, total sales increase. This reduces the amount of fixed costs that must be paid out of each dollar of sales, thus increasing profit.