Scarcity: The World of Trade-Offs

1. Chapter 2 – Scarcity & 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. • It is not the same thing as poverty.

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. Scarcity (cont'd) • Resources orFactors of Production • Land • Natural resources or the gifts of nature • Labor • The human resource

6. Scarcity (cont'd) • Resources orFactors of Production • Capital – 2 kinds of capital • Physical Capital • All manufactured resources • Human Capital • Accumulated training and education of workers

7. Scarcity (cont'd) • Resources orFactors of Production • Entrepreneurship • Person who organizes, manages, and assembles the other resources • Risk taker • Maker of basic business policy decisions

8. Scarcity (cont'd) • Goods versus Economic Goods • Goods are all things from which individuals derive satisfaction or happiness. • Economic goods are scarce goods, for which the quantity demanded exceeds the quantity supplied.

9. Scarcity (cont'd) • Services • Tasks that are performed for someone else • Can be referred to as intangible goods

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

11. Wants and Needs • Needs • To economists, the term need is not definable. • Wants • Goods and services on which we place a positive value • People have unlimited wants.

12. 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

13. Scarcity, Choice, and Opportunity Cost (cont'd) • Questions: • What is the opportunity cost of attending this economics class? • What is the opportunity cost of attending a concert by your favorite band? • What is the opportunity cost of increasing research for an AIDS vaccine?

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

15. E-Commerce Example: Making It Easier to Get to the “Submit Order” Button • About half of all consumers who placed items in online “shopping carts” abandon them before authorizing payment. • To reduce the opportunity cost of purchasing online, Internet sellers are simplifying the checkout process. • For an Internet retailer, what is the opportunity cost of failing to simplify its software in a way that encourages consumers to finalize orders?

16. The World of Trade-Offs • Whenever you engage in any activity, using any resource, you are trading off the use of that resource for one or more alternative uses. • The value of the trade-off is represented by the opportunity cost, (that which you give up to obtain something else).

17. 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.

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

19. ProductionPossibilities Curve (PPC) • Questions • What would happen to the production possibilities curve if you spent more time studying? • What would happen to your potential grades?

20. 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

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

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

23. The Choices Society Faces (cont'd) • Production possibilities assumptions • Resources are fully employed • Production takes place over a specific time period • Resources are fixed for the time period • Technology does not change over thetime period

24. The Choices Society Faces (cont'd) • Technology • Society’s pool of applied knowledge concerning how goods and services can be produced

25. International Example: Making Death Illegal—At Least, Inside City Limits • Why did the town of Le Lavandou, France, make it illegal to die within city limits unless you owned a cemetery plot? • The 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.

26. The Choices Society Faces (cont'd) • Efficiency • The case in which an economy is producing the maximum output. (points A,B,C,D,E,F,G on your graph) • Simple definition - Getting the most out of what we have to work with.

27. The Choices Society Faces (cont'd) • Inefficient Point • Any point below the production possibilities curve at which the use of resources is not generating the maximum possible output. (point S) • Law of Increasing Relative Cost • As society attempts to produce more of a good, the opportunity cost of additional units of that good generally increases • Accounts for bowed shape of the PPC

28. Figure 2-3 The Law of Increasing Relative Cost

29. The Choices Society Faces (cont'd) • In general, the more specialized the resources, the more bowed the PPC

30. 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

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

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

33. Consumer goods Goods produced for personal satisfaction Capital goods Goods used to produce other goods Figure 2-5 Capital Goods and Growth

34. Figure 2-5 Capital Goods and Growth, Panel (a)

35. Figure 2-5 Capital Goods and Growth, Panel (b)

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

37. Capital Goods and Growth (cont'd) • Observations • An increase in capital goods at present will lead to a higher rate of economic growth in the future. • In the future, the economic system can produce more consumer goods.

38. Specialization and Greater Productivity • Specialization • Organization of economic activity among different individuals and regions • Leads to greater productivity

39. Specialization and Greater Productivity (cont'd) • Comparative Advantage • The ability to produce a good or service at a lower opportunity cost • Is always a relative concept

40. Specialization and Greater Productivity (cont'd) • Absolute Advantage • The ability to produce more units of a good or service using a given quantity of labor or resource inputs • Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs

41. Division of Labor • Rational individuals choose their comparative advantage and specialize. • Specialization leads to division of labor. • Adam Smith, in The Wealth of Nations, illustrated division of labor in pin making.

42. Division of Labor (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

43. Comparative Advantageand Trade Among Nations • When nations specialize where they have a comparative advantage and then trade with the rest of the world • Economic efficiency improves • Output increases • Average standard of living rises

44. International Example: Multiple Comparative Advantages in Dishwasher Production • Maytag dishwashers assembled in Jackson, Tennessee contain components manufactured throughout the world. • Some may consider it a plus to buy an appliance 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 U.S. borders.

45. Issues and Applications: An Economic Theory of Neanderthals’ Extinction • Extinction of Neanderthals was a mystery to anthropologists and archeologists. • Question • Why did Cro-Magnon win out over Neanderthals? • Answer • Able to develop new technology, specialize, and trade