Class Two

Class Two Scarcity

Case one: the usage of crude oil :

531,000,000,000-----barrels of oil underground

16,500,000,000------barrels of oil we use everyday

How soon will we run out the oil? By simply dividing the 2 numbers, It’ll be 32.2 years…..

REALLY? Actually those are the number 40 years ago.

1349.000.000.000------barrels of oil underground NOW

30.500.000.000------barrels of oil per year people consume NOW

Which means we should have already run out of oil, but why we haven’t and actually the barrel of oils economically available now doubled?

In fact, when we look from the standpoint of an economist, we’ll never run out of oil. The reasons are quite naïve:

1.First，Oil is a kind of natural resource that resulted from the dead bodies of animals and the ruins of ancient forests. Thus it’s scientifically impossible for oil to “ run out”

2.Second and the most important reason, which is a simple but momentously recurrent phrase in economics：“People response to incentives.”From the theory of supply and demand we know that, the decrease of the commodity CAN be supplied would result in a change in supply ( to the left if we see it on a supply and demand graph), which means the decrease of quantity supplied at EVERY price ( in other words, an increase of price at EVERY level of quantity supplied by the supplier). The change in price, posts an incentive to those who benefits from the energy produced by the usage of oil, basically everybody in modern world. How would they, or we, response? We can draw this question through a simple reasoning: when the oil is gradually running out, the cost of getting extra oil keeps increasing (increasing marginal cost). Then, at some point, the cost of getting extra barrel of oil from the underground will finally equal and then surpass the benefit of, or in other words, the energy produced by, the extra barrel of oil. Thus, why would a man take so much effort to gain something that doesn’t compensate for his cost? Rational people think at margin. When the marginal cost of oil surplus the marginal profit of oil (when we say cost, we mean the opportunity cost, so the comparatively increasing advantage of other alternative natural resources would not bother us), rational customers will just stop purchasing oil and then switch to other alternative natural resources which is comparatively more affordable than oil. In conclusion, when the oil is running out, it’s getting harder and harder for people to extract it from the underground. When the benefit of extracting extra barrel of oil is less than the effort people makes to get it, people will find new technologies to make it easier to extract the oil or just stop using oil and turn to other alternative energy resources, for instance, the wind power.

Case two: beans in the classroom

If the classroom is full of beans, everybody is free to eat them, and the only restriction is that the shell must be left within the room, how soon will people eat all the beans?

NEVER! Basically for the same reason we discussed above.

*How’s the two cases above related to scarcity?

The very nature of the increasing marginal cost and decreasing marginal profit, as we mentioned as important tools to illustrate “why we’ll never run out of oil”, just resulted from the scarcity: because it’s no infinite, oil can never be extracted as easily as always because of the increasing difficulty of extracting it from the deeper underground.