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Scarcity, opportunity cost, Production Possibilities Curves and Market Systems

Scarcity, opportunity cost, Production Possibilities Curves and Market Systems. AP Macro Unit I. The central economic problem . Scarcity : unlimited wants and limited resources Resources include C apital, E ntrepreneurship, L abor & L and

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Scarcity, opportunity cost, Production Possibilities Curves and Market Systems

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  1. Scarcity, opportunity cost, Production Possibilities Curves and Market Systems AP Macro Unit I

  2. The central economic problem • Scarcity: unlimited wants and limited resources • Resources include Capital, Entrepreneurship, Labor & Land • Decisions must be made. Trade-offs result. The cost of choosing one good is giving up another. This is called opportunity cost.

  3. Illustrating opportunity cost • Simple models show economic problems with two variables. • It is assumed that the variables are the only factors that change. • Ceteris paribus means all other things are equal. Increased production of one good causes decreased production of the other. The decreased production is the opportunity cost of the increase.

  4. More on production possibilities • Points inside the curve (to the left) show inefficiency. • Points outside the curve are impossible without increased resources or improved technology. • Points on the curve are possible if all resources are fully employed.

  5. Reaching the impossible • An increase in available resources or improved technology can result in economic growth.

  6. Increasing opportunity cost • The opportunity cost of an additional storage shed (8 to 9) is 70 crab puffs. • Storage shed production results in increasing opportunity costs. • A convex curve always indicates increasing opportunity cost.

  7. Constant opportunity cost • The opportunity cost of additional sheds does not change. Each additional unit costs the same amount of crab puffs. • The opportunity cost of more butter also remains constant.

  8. Decreasing opportunity cost • When the curve is concave, there are decreasing opportunity costs. • The opportunity cost of the first the storage shed is 250 crab puffs; the ninth shed is only 15.

  9. Scarcity and allocation: 3 economic systems Societies have developed 3 basic economic systems to allocate resources. • Traditional • Command • Market Mixed economies have elements of two or all basic systems

  10. Traditional economy • A traditional economy is an economic system in which resources are allocated by inheritance, and which has a strong social network and is based on primitive methods and tools. It is strongly connected to subsistence farming.

  11. Command economy • A command economy is economic system characterized by a central authority that makes most of the major economic decisions

  12. Market economy • In a market economy or free enterprise economy supply, demand, and the price system help people make decisions and allocate resources; based upon three freedoms: • freedom of the consumer to choose among competing products and services • freedom of the producer to start or expand a business • freedom of the worker to choose a job and employer

  13. Advantages & disadvantages of economic systems • http://www.glencoe.com/cgi-bin/pdfServer.pl/sec/socialstudies/ose/epp2005/docs/chap02.pdf

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