Folks,

Using Excel spreadsheets, I adapted Lesson 1 of Robert P. Murphy’s book, Lessons for the Young Economist, Thinking Like an Economist. Chiefly, I will mention his exposition of the relationship between scarcity, exchange, and tradeoffs.

Robby, the Castaway

Pictured below is Robby, the castaway. He is on an isolated island with 10 trees in front of him. These trees have many uses, but Robby decides to build houses using the trees. One tree (x) can make one house (y) to keep things simple. Scarcity means that Robby has unlimited wants (trees for weapons, a nice view, trees for a boat to catch fish, a house to live in, etc.) but limited resources to satisfy those wants. I illustrate below Robby in the image that he would have 15 houses and 15 trees as desired, but he cannot even have 10 houses without giving up 10 trees. As we can see in the visualization, Robby could use all 10 trees to make 10 houses and would have no more trees left over to serve other purposes. Robby chooses what happens to these trees but knows he cannot make weapons, vehicles, or shelter without using them.

Robby builds his housing inventory using the trees below but loses trees doing so. The exchange is with nature, where Robby trades the current situation (no shelter) for a more satisfactory one (with shelter). The tradeoff is the alternative use for the trees should Robby make a house with one.

Robby is the name of our protagonist on the island, and he has to give up trees (and their other uses) to build houses so as not to freeze to death.

Hector and David, Neighbors

Let’s move to another setting where two neighbors barter with each other. The neighbors are Hector, a grape (x) collector, and David, a burger (y) maker. Hector wants more burgers but can only obtain more by giving up more grapes. Hector’s “Wants Table” could be the 10 grapes he owns with the 5 burgers that David has without providing any value to David for the burgers. Still, unfortunately, Hector has to give up grapes to get burgers (whether it’s from David or losing produced grapes to produce burgers in Hector’s kitchen). Hector and David agree to exchange 2 grapes for 1 burger, assuming David likes grapes.

Burgers and grapes are scarce, with Hector wanting all of the grapes and burgers in this micro-society I have built, but Hector can only obtain more by exchanging with David and trading off grapes.

David gives 1 burger for Hector’s 2 grapes. The exchange is because Hector wants more burgers but can only get them by giving up grapes.

And here is Hector’s “Wants Table” as he builds his burger inventory while losing grapes. The fifth burger is obtained by trading his last two grapes. David can go down a similar thought process (not illustrated) where he wants more burgers and grapes than possible but has to build his grape inventory by exchanging burgers.

Hector wants all the burgers and grapes in society but can only obtain burgers by trading grapes.

Bill Gates, the Philanthropist

Robert P. Murphy explains that even Bill Gates, a wealthy man, encounters scarcity daily. Let’s say he has $100 to spend in a single day. The exchange he would engage in is the giveaway of money for a meal, let’s assume, and the tradeoff would be alternative uses of that money because the meal and the money are scarce goods.

Bill Gates’ “Wants Table” could be the $100 with the 10 meals he can purchase in a single day, but to get the meals, he needs to pay $10 a pop to get what he wants.

Bill Gates with $100 looking to spend on meals.

On the other side of the exchange is the chef serving Bill Gates. What is scarce to her? Well, the pizzas and the money involved in the trade. The chef would love to have $100 and the 10 pizzas in her hands without doing any work. After all, who wouldn’t just want to sit around eating 10 pizzas with $100 every day to spend? Money is scarce for the chef because it is her income, and she must give up her delicious pizzas to earn that income.

The chef can only gain the income she wants (money is the scarce good) by giving up the pizzas she owns.

The good we typically trade off daily would be leisure time (or the pleasure derived from it) for income. The exchange, in this case, would be the time in hours of leisure we sacrifice to our boss, who takes the hours like a good, for several dollars in exchange for compensation (because the time we spend in the office is time we could have spent lying on the couch). To the boss, the leisure time he can take from a worker is scarce because he needs to give up money to get it.

Robert P. Murphy uses the example of a missionary who needs to forego leisure time to teach people about the Bible. The “income” the missionary earns is the satisfaction of teaching people about the Bible, which can only be gained by giving up leisure time.

Wrapping up

So, I adapted Murphy’s explanation of the relationship between scarcity, exchange, and tradeoffs. Scarcity drives tradeoffs and exchange. I stated that an economic actor has a “Wants Table,” like a Christmas wishlist, but can only get the things in this table by giving away some of what he owns. For instance, Robby wants land with 10 houses and 10 trees for a nice view but can only get 1 house if he knocks down one tree (1 house and 9 trees remain). The economic actor can build up their inventory of what they want by progressively removing the things they have through exchange. The same principle can be applied to money spent on food and money given for labor. There are tradeoffs involved in those processes because the goods involved are scarce.

If you got to the end of this, I appreciate it. Thanks for reading, and I hope this was helpful.