Scarcity

Limited resources and unlimited wants = scarcity. Scarcity is “The Economic Problem.” It is the reason economics exists. There are only 24 hours in a day. There are only 5 cupcakes, but you want 6. Too bad. Why? Scarcity.

Opportunity Cost

Any time you choose to do something, you are choosing not to do something else.

Example:

You can wake up and go to school or you can stay in bed and sleep. If you choose to stay in bed, you miss your favorite class (economics). If you choose to go to school, you miss your dreams (also economics. I am everywhere. You cannot escape me.).

Pearl Exchange

Demonstration

• Two students acted out a deal in front of the class.
• Only the buyer knew their maximum price, only the seller knew their minimum price.
• Question: Who won?
• Lesson: Both won. Buyers get consumer surplus, sellers get producer surplus.

Setup

• Half the class started with a “pearl”. They were sellers.
• The other half had no pearl. They were buyers.

The Rules

• Sellers and buyers had to negotiate a price.
• After each sale, sellers gave me the price.
• We tracked prices and looked for the best negotiators.

Four Rounds

Day 1

• Sellers knew their minimum price. Buyers knew their maximum price.
• Students had 5 minutes to trade.
• We looked at average prices and number of trades.
• Discussion: Why not charge or pay extreme prices?

Day 2

• Switched Roles: Sellers became buyers and buyers became sellers.
• Rule: No repeat partners.
• We compared prices to Day 1. They are converging.
• Questions:
  • What happens to prices if trading repeats many times? They keep converging to equilibrium
  • How did you negotiate a good deal?
  • What if oysters died and pearls got scarce?

Day 3

• A virus killed many clams. A third of sellers switched to buyers.
• Fewer sellers => less supply.
• Discussion:
  • Was this a change in demand (what buyers want) or supply (what sellers have)?
  • Who competed in this day? Buyers or sellers?
  • What if diamonds (a substitute) got cheaper?

Day 4

• Pearls are too expensive. Diamonds are cheaper. Many buyers left the pearl market.
• Discussion:
  • Who competed more here?
  • What happened to prices?

4. Takeaways

• Markets depend on scarcity, information, and competition.
• Prices shift with changes in supply and demand.
• Buyers and sellers both benefit when trade happens.