Introduction to Consumer Choice in a World of Scarcity
BRING IT HOME
Choices … To What Degree?
In 2015, the median income for workers who hold master’s degrees varies from males to females. The average of the two is $2,951 weekly. Multiply this average by 52 weeks, and you get an average salary of $153,452. Compare that to the median weekly earnings for a full-time worker over 25 with no higher than a bachelor’s degree: $1,224 weekly and $63,648 a year. What about those with no higher than a high school diploma in 2015? They earn just $664 weekly and $34,528 over 12 months. In other words, as the Bureau of Labor Statistics (BLS) explains, earning a bachelor’s degree boosted salaries 54% over what you would have earned if you had stopped your education after high school. A master’s degree yields a salary almost double that of a high school diploma.
Given these statistics, we might expect many people to choose to go to college and at least earn a bachelor’s degree. Assuming that people want to improve their material well-being, it seems likely they would make choices that provide them with the greatest opportunity to consume goods and services. As it turns out, the analysis is not nearly as simple as this. In fact, in 2014, the BLS reported that while almost 88% of the population in the United States had a high school diploma, only 33.6% of 25–65 year olds had bachelor’s degrees, and only 7.4% of 25–65 year olds in 2014 had earned a master’s.
This brings us to this chapter’s subject: why people make the choices they make and how economists explain those choices.
Chapter Overview
In this chapter, you will learn about:
- How Individuals Make Choices Based on Their Budget Constraints
- Consumption Choices
- How Changes in Income and Prices Affect Consumption Choices
Microeconomics seeks to understand the behavior of individual economic agents such as individuals and businesses. Economists believe that we can analyze individuals’ decisions, such as what goods and services to buy, as choices we make within certain budget constraints. Generally, consumers try to get the most for their limited budget. In economic terms they try to maximize total utility and satisfaction given their budget constraints.
Everyone has their own personal tastes and preferences. The French say: Chacun à son goût, or to “each to his own taste.” An old Latin saying states, “De gustibus non est disputandum” or “There’s no disputing taste.” If people base their decisions on their own tastes and personal preferences, then how can economists hope to analyze the choices consumers make?
An economic explanation for why people make different choices begins with accepting the proverbial wisdom that tastes are a matter of personal preference. However, economists also believe that the choices people make are influenced by their incomes, the prices of goods and services they consume, and by factors like where they live. This chapter introduces the economic theory of how consumers make choices about what goods and services to buy with their limited income.
This chapter will illustrate how economic theory provides a tool to systematically look at the full range of possible consumption choices to predict how consumption responds to changes in prices or incomes. After reading this chapter, consult Appendix B, Indifference Curves, to learn more about representing utility and choice through indifference curves.
You will learn quickly when you examine the relationship between economics and scarcity that choices involve trade-offs. Every choice has a cost.
In 1968, the Rolling Stones recorded “You Can’t Always Get What You Want.” Economists chuckled, because they had been singing a similar tune for decades. English economist Lionel Robbins (1898–1984), in his Essay on the Nature and Significance of Economic Science in 1932, described not always getting what you want in this way:
“The time at our disposal is limited. There are only twenty-four hours in the day. We have to choose between the different uses to which they may be put … Everywhere we turn, if we choose one thing we must relinquish others which, in different circumstances, we would wish not to have relinquished. Scarcity of means to satisfy given ends is an almost ubiquitous condition of human nature.”
As people live in a world of scarcity, they cannot have all the time, money, possessions, and experiences they wish. Neither can society.
This chapter will include a discussion of scarcity and the economic way of thinking by first introducing three critical concepts: opportunity cost, marginal decision-making, and diminishing returns. Later, it will consider whether the economic way of thinking accurately describes either how we make choices and how we should make them.