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Chapter 2

Chapter 2. Scarcity and the World of Trade-Offs. Scarcity. Scarcity Is the most basic concept in all of economics Occurs when the ingredients for producing things that people desire are insufficient to satisfy all wants

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Chapter 2

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  1. Chapter 2 Scarcity and the World of Trade-Offs

  2. Scarcity Scarcity Is the most basic concept in all of economics Occurs when the ingredients for producing things that people desire are insufficient to satisfy all wants Means we never have enough of everything, including time, to satisfy our everydesire

  3. Scarcity (cont'd) What scarcity is NOT It is not a shortage. Why? You can eliminate a shortage by supplying more or by reducing the quantity demanded through raising the price It is not the same thing as poverty. Why?

  4. Scarcity (cont'd) Production Any activity that results in the conversion of resources into products that can be used in consumption Resources or Factors of Production Inputs that are used to produce things that people want

  5. Resources (Factors of Production) Land (natural resources or the gifts of nature) Labor (human resource) • Physical Capital • All manufactured resources • Human Capital • Accumulated training and education of workers • Entrepreneurship • Risk taker • Maker of basic business policy decisions

  6. Scarcity (cont'd) Recall Scarcity occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants. • Needs • To economists, the term need is not definable. • Wants • Goods and services on which we place a positive value • People have unlimited wants.

  7. Scarcity, Choice, and Opportunity Cost Opportunity Cost The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want (forgone opportunity) Or ask yourself: What would you do if you did not do this? What would you do if you didn’t come to school? What would you do if you didn’t go to college?

  8. Scarcity, Choice, and Opportunity Cost (cont'd) Limited Resources & Unlimited Wants Scarcity Choices Opportunity Cost

  9. The World of Trade-Offs (cont'd) Opportunity cost graphically The production possibilities curve (PPC) represents all possible maximum combinations of total output that could be produced. Along the production possibilities curve, there is a fixed quantity of productive resources of a given quality being used efficiently. Consider… You are taking two courses, MATH and ECON…

  10. Figure 2-1 Production Possibilities Curve for Grades in Mathematics and Economics (Trade-Offs) Z W

  11. The World of Trade-Offs (cont'd) The Production Possibilities Curve (PPC) What would happen to the production possibilities curve if you spent more time studying? 12 hours to 20 hours What would happen to your potential grades?

  12. The Choices Society Faces PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs At the individual level At the societal level

  13. The Choices Society Faces (cont'd) Production possibilities assumptions Resources are fully employed Resources are fixed for the time period Technology does not change over the time period

  14. The Choices Society Faces (cont'd) Efficient Point Any point on the production possibilities curve at which resources generate the maximum possible output (point ??) Inefficient Point Any point below the production possibilities curve at which resources do not generate the maximum possible output (point ??)

  15. Figure 2-4 Economic Growth Allows for More of Everything • Economic growth • Increases the production possibilities of both goods • Occurs over a period of time • Is illustrated by an outward shift of the production possibilities curve

  16. Specialization and Greater Productivity (cont'd) Division of Labor Assigning different workers different tasks to produce a good or service) Organizing a division of labor within a firm to increase output Examples Automobile production Hospital operating room Henry Ford’s Model T: mass production w/ assembly lines

  17. Myth #2: I can have the cake and eat it too. • Nothing is “free” in this world • …including freedom • The problem is: Can you or are you willing to pay the “price”? • For example: Are you willing to pay the “price” for an A in this class? Over 80% of students are NOT.

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