Chapter 2 - Scarcity and the World of Trade-Offs 1

Learning Objectives

Evaluate whether even affluent people face the problem of scarcity

Understand why economists consider wants but not needs

Explain why the scarcity problem induces individuals to consider opportunity costs

Chapter 2 - Scarcity and the World of Trade-Offs 2

Learning Objectives

Discuss why obtaining increasing increments of any particular good entails giving up more and more units of other goods

Explain why society faces a trade-off between consumption goods and capital goods

Distinguish between absolute and comparative advantage

Chapter 2 - Scarcity and the World of Trade-Offs 3

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 every desire

Chapter 2 - Scarcity and the World of Trade-Offs 4

Scarcity

What scarcity is NOT

– It is not a shortage.

– It is not the same thing as poverty.

Chapter 2 - Scarcity and the World of Trade-Offs 5

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

Chapter 2 - Scarcity and the World of Trade-Offs 6

Scarcity

Resources or Factors of Production

– Land

• Natural resources or the gifts of nature

– Labor

• The human resource

Chapter 2 - Scarcity and the World of Trade-Offs 7

Scarcity

Resources or Factors of Production

– Physical Capital

• All manufactured resources

– Human Capital

• Accumulated training and education of workers

Chapter 2 - Scarcity and the World of Trade-Offs 8

Scarcity

Resources or Factors of Production

– Entrepreneurship

• Person who organizes, manages, and assembles the other resources

• Risk taker

• Maker of basic business policy decisions

Chapter 2 - Scarcity and the World of Trade-Offs 9

Scarcity

Economic Goods

– Scarce goods, for which the quantity demanded exceeds the quantity supplied at zero price.

Chapter 2 - Scarcity and the World of Trade-Offs 10

Scarcity

Services

– Tasks that are performed for someone else

– Can be referred to as intangible goods

Chapter 2 - Scarcity and the World of Trade-Offs 11

Scarcity

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

Chapter 2 - Scarcity and the World of Trade-Offs 12

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.

Chapter 2 - Scarcity and the World of Trade-Offs 13

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

Chapter 2 - Scarcity and the World of Trade-Offs 14

Scarcity, Choice, and Opportunity Cost

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?

Chapter 2 - Scarcity and the World of Trade-Offs 15

Limited Resources & Unlimited Wants

Scarcity

Choices

Opportunity Cost

Scarcity, Choice, and Opportunity Cost

Chapter 2 - Scarcity and the World of Trade-Offs 16

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?

Chapter 2 - Scarcity and the World of Trade-Offs 17

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).

Chapter 2 - Scarcity and the World of Trade-Offs 18

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.

Chapter 2 - Scarcity and the World of Trade-Offs 19

Production Possibilities Curve for Grades in Mathematics and Economics (Trade-Offs)

Chapter 2 - Scarcity and the World of Trade-Offs 20

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?

– Is it possible that terms of the trade-off might not be constant?

Chapter 2 - Scarcity and the World of Trade-Offs 21

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

Chapter 2 - Scarcity and the World of Trade-Offs 22

Society’s Trade-Off Between Digital Cameras and Pocket PCs

Chapter 2 - Scarcity and the World of Trade-Offs 23

Society’s Trade-Off Between Digital Cameras and Pocket PCs

Chapter 2 - Scarcity and the World of Trade-Offs 24

The Choices Society Faces

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

Chapter 2 - Scarcity and the World of Trade-Offs 25

The Choices Society Faces

Technology

– Society’s pool of applied knowledge concerning how goods and services can be produced

Chapter 2 - Scarcity and the World of Trade-Offs 26

The Choices Society Faces

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

Chapter 2 - Scarcity and the World of Trade-Offs 27

The Choices Society Faces

Inefficient Point

– Any point below the production possibilities curve at which the use of resources is not generating the maximum possible output

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

Chapter 2 - Scarcity and the World of Trade-Offs 28

The Law of Increasing Relative Cost

Chapter 2 - Scarcity and the World of Trade-Offs 29

The Choices Society Faces

In general, the more specialized the resources, the more bowed the PPC

Chapter 2 - Scarcity and the World of Trade-Offs 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

Chapter 2 - Scarcity and the World of Trade-Offs 31

Economic Growth Allows for More of Everything

Chapter 2 - Scarcity and the World of Trade-Offs 32

The Trade-Off Between the Present and the Future

PPC

– Can be used to illustrate the trade-off between present and future consumption

Consumption

– The use of goods and services for personal satisfaction

Chapter 2 - Scarcity and the World of Trade-Offs 33

Capital Goods and Growth

Consumer goods

– Goods produced for personal satisfaction

Capital goods

– Goods used to produce other goods

Chapter 2 - Scarcity and the World of Trade-Offs 34

Capital Goods and Growth

Observations

– Increase in capital goods stimulates economic growth

– 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.

Chapter 2 - Scarcity and the World of Trade-Offs 35

Specialization and Greater Productivity

Specialization

– Organization of economic activity among different individuals and regions

– Leads to greater productivity

Chapter 2 - Scarcity and the World of Trade-Offs 36

Specialization and Greater Productivity

Comparative Advantage

– The ability to produce a good or service at a lower opportunity cost

– Is always a relative concept

Chapter 2 - Scarcity and the World of Trade-Offs 37

Specialization and Greater Productivity

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

Chapter 2 - Scarcity and the World of Trade-Offs 38

Division of LaborRational individuals choose their

comparative advantage and specialize.

Specialization leads to division of labor.

Chapter 2 - Scarcity and the World of Trade-Offs 39

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

Chapter 2 - Scarcity and the World of Trade-Offs 40

Comparative Advantageand Trade Among Nations

Recall

– Analysis of absolute advantage, comparative advantage, and specialization—applicable to individuals and nations

Chapter 2 - Scarcity and the World of Trade-Offs 41

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

Chapter 2 - Scarcity and the World of Trade-Offs 42

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.

Chapter 2 - Scarcity and the World of Trade-Offs 43

Summary Discussion of Learning Objectives

The problem of scarcity, even for the affluent

– Scarcity and poverty are not synonymous.

Why economists consider individuals’ wants but not their needs

– Needs are not objectively definable.

– Wants are things on which we place a positive value.

Chapter 2 - Scarcity and the World of Trade-Offs 44

Summary Discussion of Learning Objectives

Why the scarcity problem leads people to evaluate opportunity costs

– Allocating resources to producing one good means losing the opportunity to have another one.

Why getting more units of one good requires giving up more and more of another

– Resources are specialized

Chapter 2 - Scarcity and the World of Trade-Offs 45

Summary Discussion of Learning Objectives

There is a trade-off between consumption goods and capital goods.

– As more resources are devoted to the production of capital goods, we can expect the rate of economic growth to increase.

Chapter 2 - Scarcity and the World of Trade-Offs 46

Summary Discussion of Learning Objectives

Absolute versus comparative advantage

– One finds one’s absolute advantage by producing more of a specific good than someone else who uses the same amount of resources.

– One finds one’s comparative advantage by looking at the activity that has the lowest opportunity cost.