Insurance Fi351

Read Chapter 1 of the text.

View the PowerPoint Presentation on Chapter 1.

Read the following web lecture 1 (You should read the text first to understand the

web lecture).

Exercises below are not assignments, but for your own practice

WEB LECTURE 1

1. Scarcity, Choice, Benefit and Cost (opportunity cost)

Scarcity and choice are the two essential ingredients of an economic topic. Goods are

scarce because desire for them far outstrips their availability in nature. Scarce goods are

called economic goods. Scarcity forces us to choose among available

alternatives. Scarcity and poverty are not the same thing. Absence of poverty implies

some basic level of need has been met. An absence of scarcity would imply that all of our

desires for goods are fully satisfied. We may someday eliminate poverty, but scarcity

will always be with us.

Every society must have a method to ration the scarce resources among competing uses.

Various factors can be used to ration (first-come, first-served). In a market setting, price

is used to ration goods and resources. When price is used, the good or resource is

allocated to those willing to give up “other things” in order to obtain ownership

rights. Competition is a natural outgrowth of the need to ration scarce goods. Changing

the rationing method used will change the form of competition, but it will not eliminate

competitive tactics.

Lesson about making choice (decision) is summarized in the adage: “There is no such

thing as a free lunch.” To get one thing that we like, we usually have to give up another

thing that we like. Making choices requires trading off one goal against another.

Because people face tradeoffs, making decisions (choices) requires comparing the costs

and benefits of alternative courses of action. In many cases, however, the cost of some

action is not as obvious as it might first appear. This cost is called the opportunity cost,

whatever that must be given up to obtain some item.

Many...