ECON 152 PRINCIPLES OF MICROECONOMICS Chapter 2 Scarcity

ECON 152 – PRINCIPLES OF MICROECONOMICS Chapter 2: Scarcity and the World of Trade-offs Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

Introduction 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. 2

Scarcity n Scarcity ¨ Occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants 3

Scarcity n What scarcity is NOT: ¨ It is not a shortage. ¨ It is not the same thing as poverty. 4

Scarcity n Production ¨ Any activity that results in the conversion of resources into products that can be used in consumption n Resources or Factors of Production ¨ Inputs that are used to produce things that people want 5

Scarcity n Resources or Factors of Production ¨ Land n Natural resources or the gifts of nature ¨ Labor n The human resource 6

Scarcity n Resources or Factors of Production ¨ Physical n All manufactured resources ¨ Human n Capital Accumulated training and education of workers 7

Scarcity n Resources or Factors of Production ¨ Entrepreneurship Person who organizes, manages, and assembles the other resources n Risk taker n Maker of basic business policy decisions n 8

Scarcity n Goods versus Economic Goods ¨ Goods are all things from which individuals derive satisfaction and are, thus, valued. ¨ Economic goods are goods and services produced from scarce resources. 9

Scarcity n Services ¨ Tasks that are performed for someone else ¨ Sometimes referred to as “intangible goods” 10

Wants and Needs n Needs (from the economic perspective) ¨ Are objectively undefinable ¨ Could be a wish, want, or a life-saving necessity n Wants ¨ Desirable things that people wish to have ¨ People have unlimited wants 11

Scarcity, Choice, and Opportunity Cost n Opportunity Cost ¨ The highest-valued, next-best alternative that must be sacrificed to attain something or satisfy a want 12

Scarcity, Choice, and Opportunity Cost In economics, cost is always a forgone opportunity. 13

Scarcity, Choice, and Opportunity Cost Limited Resources & Unlimited Wants Scarcity Choices Opportunity Cost 14

The World of Trade-Offs n Whenever resources are used for any activity, the user is sacrificing the opportunity to use those resources for other things. 15

The World of Trade-Offs n 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. 16

Production Possibilities Curve (PPC) Figure 2 -1 17

Production Possibilities Curve (PPC) n 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? 18

The Choices Society Faces n 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 the time period 19

The Choices Society Faces n Technology ¨ Society’s pool of applied knowledge concerning how goods and services can be produced 20

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

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

The Law of Increasing Relative Costs Figure 2 -3 23

The Choices Society Faces n 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. 24

Economic Growth and the Production Possibilities Curve n 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 25

Economic Growth Allows for More of Everything Figure 2 -4 26

The Trade-Off Between the Present and the Future The PPC can be used to illustrate the trade-off between present and future consumption. n Consumption n ¨ The use of goods and services for personal satisfaction 27

Capital Goods and Growth Capital Goods per Year n Consumer goods ¨ Goods produced for personal satisfaction n A Capital goods ¨ Goods used to produce other goods B 7 8 Consumption Goods per Year ($ trillions) 28

Capital Goods and Growth Recreation per Year Capital Goods per Year Future growth as a result of A on the left-hand diagram A Today B 7 8 Consumption Goods per Year ($ trillions) Figure 2 -5, Panel (a) Food per Year 29

Capital Goods and Growth Recreation per Year Capital Goods per Year Future growth as a result of C on the left-hand diagram C A Today B Consumption Goods per Year ($ trillions) Figure 2 -5, Panel (b) Food per Year 30

Capital Goods and Growth n Observations ¨ Forgo consumption goods to produce capital goods ¨ Increase in capital goods stimulates economic growth 31

Specialization and Greater Productivity n Specialization ¨ Division of productive activities ¨ Leads to greater productivity 32

The Choices Society Faces n Question ¨ How does the specialization of resources influence the shape of the production possibilities curve? 33

Specialization and Greater Productivity n Absolute Advantage ¨ The ability to produce more units of a good or using a given quantity of labor or service resource inputs 34

Specialization and Greater Productivity n 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 35

Division of Labor n 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 n Examples ¨ Automobile production ¨ Hospital operating room 36

Comparative Advantage and Trade Among Nations n Question ¨ Why n trade? Answer ¨ Both participating countries benefit ¨ Comparative advantage and specialization increases output and income of both 37

ECON 152 – PRINCIPLES OF MICROECONOMICS Chapter 2: Scarcity and the World of Trade-offs Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.