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.

Scarcity n Scarcity ¨ Occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants 2

Scarcity n What scarcity is NOT: ¨ It is not a shortage. ¨ It is not the same thing as poverty. 3

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 4

Scarcity n Resources or Factors of Production ¨ Land n Natural resources or the gifts of nature ¨ Labor n The human resource 5

Scarcity n Resources or Factors of Production ¨ Physical n All manufactured resources ¨ Human n Capital Accumulated training and education of workers 6

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 7

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. 8

Scarcity n Services ¨ Tasks that are performed for someone else ¨ Sometimes referred to as “intangible goods” 9

Wants and Needs n Needs ¨ To n economists, the term need is not definable. Wants ¨ Goods and services on which we place a positive value ¨ People have unlimited wants. 10

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 11

Scarcity, Choice, and Opportunity Cost In economics, cost is always a forgone opportunity. 12

Scarcity, Choice, and Opportunity Cost Limited Resources & Unlimited Wants Scarcity Choices Opportunity Cost 13

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. 14

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. 15

Production Possibilities Curve (PPC) 16

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? 17

n PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs ¨ At the individual level ¨ At the societal level 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 Servers and HDTVs 21

Society’s Trade-Off Between Servers and HDTVs 22

The Choices Society Faces n Efficiency ¨ The case in which a given level of inputs is used to produce the maximum output possible ¨ Alternatively, the situation in which a given output is produced at minimum cost 23

The Choices Society Faces n Inefficient Point ¨ Any point below the production possibilities curve at which the use of resources is not generating the maximum possible output n 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 24

The Law of Increasing Relative Costs 25

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 26

Economic Growth Allows for More of Everything 27

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 28

Capital Goods and Growth n Consumer goods ¨ Goods produced for personal satisfaction n Capital goods ¨ Goods used to produce other goods 29

Capital Goods and Growth 30

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 31

Capital Goods and Growth n Observations ¨ Forgo consumption goods to produce capital goods ¨ Increase in capital goods stimulates economic growth 32

Specialization and Greater Productivity n Specialization ¨ Division of productive activities ¨ Leads to greater productivity 33

The Choices Society Faces n Question ¨ How does the specialization of resources influence the shape of the production possibilities curve? 34

Specialization and Greater Productivity n In general, the more specialized the resources, the more bowed the PPC 35

Specialization and Greater Productivity n 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 36

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 37

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 38

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 39

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.