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Chapter 2

Chapter 2. Scarcity and the World of Trade-Offs. Society always faces choices regarding use of its scarce resources. The need to devote more law enforcement resources to antiterrorism efforts means that crimes considered less threatening, such as bank robberies, are on the rise. Introduction.

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Chapter 2

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  1. Chapter 2 Scarcity and the Worldof Trade-Offs

  2. Society always faces choices regarding use of its scarce resources. The need to devote more law enforcement resources to antiterrorism efforts means that crimes considered less threatening, such as bank robberies, are on the rise. Introduction

  3. Learning Objectives • Evaluate whether even affluent people face the problem of scarcity • Understand why economists consider wants but not needs

  4. Learning Objectives • Explain why the scarcity problem induces individuals to consider opportunity costs • Discuss why obtaining increasing increments of any particular good entails giving up more and more units of other goods

  5. Learning Objectives • Explain why society faces a trade-off between consumption goods and capital goods • Distinguish between absolute and comparative advantage

  6. Chapter Outline • Scarcity • Wants and Needs • Scarcity, Choice, and Opportunity Cost • The World of Trade-Offs • The Choices Society Faces

  7. Chapter Outline • Economic Growth and the Production Possibilities Curve • The Trade-Off Between the Present and the Future • Specialization and Greater Productivity

  8. Chapter Outline • The Division of Labor • Comparative Advantage and Trade Among Nations

  9. Did You Know That … • The typical worker who commutes by car spends more than 50 hours a year stuck in traffic? • You could calculate the cost of this lost time by figuring the earnings lost as traffic delays take time away from being on the job?

  10. Scarcity • Scarcity • Occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants

  11. Scarcity • What scarcity is NOT: • It is not a shortage. • It is not the same thing as poverty.

  12. Scarcity • 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

  13. Scarcity • Resources or Factors of Production • Land • Natural resources or the gifts of nature • Labor • The human resource

  14. Scarcity • Resources or Factors of Production • Physical Capital • All manufactured resources • HumanCapital • Accumulated training and education of workers

  15. Scarcity • Resources or Factors of Production • Entrepreneurship • Person who organizes, manages, and assembles the other resources • Risk taker • Maker of basic business policy decisions

  16. Scarcity • Goods versus Economic Goods • Goods are all things from which individuals derive satisfaction and are, thus, valued. • Economicgoods are goods and services produced from scarce resources.

  17. Scarcity • Services • Tasks that are performed for someone else

  18. Scarcity • Recall • Scarcity occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants.

  19. Wants and Needs • Needs (from the economic perspective) • Are objectively undefinable • Could be a wish, want, or a life-saving necessity • Wants • Desirable things that people wish to have • People have unlimited wants

  20. Scarcity, Choice, and Opportunity Cost • Opportunity Cost • The highest-valued, next-best alternative that must be sacrificed to attain something or satisfy a want

  21. Scarcity, Choice, and Opportunity Cost • Questions • What is the opportunity cost of attending this economics class? • What is the opportunity cost of attending a Rolling Stones concert? • What is the opportunity cost of increasing research for an AIDS vaccine?

  22. Scarcity, Choice, and Opportunity Cost In economics, cost is always a forgone opportunity.

  23. Scarcity Choices Opportunity Cost Scarcity, Choice, and Opportunity Cost Limited Resources & Unlimited Wants

  24. E-Commerce Example: Making the Move to College • There is a commercial website offering for sale all of the items commonly used to furnish dorm rooms. • You can order the items online and then have them delivered to your dorm. • What criteria would you use in making the choice of whether to purchase and transport the items yourself or have them provided by this web-based enterprise?

  25. The World of Trade-Offs • Whenever resources are used for any activity, the user is sacrificing the opportunity to use those resources for other things.

  26. The World of Trade-Offs • 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.

  27. ProductionPossibilities Curve (PPC) Figure 2-1

  28. ProductionPossibilities Curve (PPC) • Questions • What would happen to the production possibilities curve if you spent more time studying? • What would happen to the potential grades? • Is it possible that terms of the trade-off might not be constant?

  29. The Choices Society Faces • Production possibilities assumptions • Resources are fully employed • Production is for a specific time period • Resources are fixed for the time period • Technology does not change over thetime period

  30. The Choices Society Faces • Technology • Society’s pool of applied knowledge concerning how goods and services can be produced

  31. Society’s Trade-Off Between Digital Cameras and Pocket PCs Figure 2-2, Panel (a)

  32. Society’s Trade-Off Between Digital Cameras and Pocket PCs Figure 2-2, Panel (b)

  33. The Law of Increasing Relative Costs Figure 2-3

  34. International Example: • Why did the town of Le Lavandou, France, make it illegal to die within city limits unless you owned a cemetery plot? • This law reflected the decision of the townspeople not to allocate any more land for the use of cemeteries. • In effect, they were choosing a point on the production possibilities curve with respect to the use of one scarce resource: land.

  35. The Choices Society Faces • Law of Increasing Relative Costs • As society attempts to produce more of a good, the opportunity cost of additional units of that good generally increases.

  36. The Choices Society Faces • Question • How does the specialization of resources influence the shape of the production possibilities curve?

  37. Economic Growth and the Production Possibilities Curve • Economic growth • Increases the production possibilities of digital cameras and pocket PCs • Occurs over a period of time • Is illustrated by an outward shift of the production possibilities curve

  38. Economic Growth Allows for More of Everything Figure 2-4

  39. The Trade-Off Between the Present and the Future • The PPC can be used to illustrate the trade-off between present and future consumption. • Consumption • The use of goods and services for personal satisfaction

  40. Consumer goods Goods produced for personal satisfaction Capital goods Goods used to produce other goods Capital Goods and Growth Capital Goods per Year A B 7 8 Consumption Goods per Year ($ trillions)

  41. Capital Goods and Growth Future growth as a result of A on the left-hand diagram Capital Goods per Year Recreation per Year A Today B 7 8 Consumption Goods per Year ($ trillions) Food per Year Figure 2-5, Panel (a)

  42. Capital Goods and Growth Future growth as a result of C on the left-hand diagram C Capital Goods per Year Recreation per Year A Today B Consumption Goods per Year ($ trillions) Food per Year Figure 2-5, Panel (b)

  43. Capital Goods and Growth • Observations • Forgo consumption goods to produce capital goods • Increase in capital goods stimulates economic growth

  44. Capital Goods and Growth • Observations • In the future the economic system can produce more consumer goods • An increase in capital goods will lead to a higher rate of economic growth in the future

  45. Specialization and Greater Productivity • Specialization • Division of productive activities • Leads to greater productivity

  46. Specialization and Greater Productivity • Absolute Advantage • The ability to produce more units of a good or using a given quantity of labor or service resource inputs

  47. Specialization and Greater Productivity • Comparative Advantage • The ability to produce a good or service at a lower opportunity cost • A relative concept • Specialize in the production for which we have a comparative advantage

  48. Division of Labor • 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

  49. Comparative Advantageand Trade Among Nations • Question • Why trade? • Answer • Comparative advantage and specialization increases output and income

  50. International Example: Comparative Advantage in Dishwasher Production • Maytag dishwashers assembled in Jackson, Tennessee contain components manufactured throughout the world. • Some consumers may consider it a plus to buy an appliance that is labeled “Made in the USA,” but the overall cost of the dishwasher is lower than it would be if all the individual parts were manufactured within US borders as well.

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