Scarcity and the World of Trade-offs 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 Scarcity Occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants 10

Scarcity What scarcity is NOT: It is not a shortage. It is not the same thing as poverty. 11

Scarcity Production Resources or Factors of 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 12

Scarcity Resources or Factors of Production Land Labor Natural resources or the gifts of nature Labor The human resource 14

Scarcity Resources or Factors of Production Physical Capital All manufactured resources Human Capital Accumulated training and education of workers 15

Scarcity Resources or Factors of Production Entrepreneurship Person who organizes, manages, and assembles the other resources Risk taker Maker of basic business policy decisions 16

Scarcity 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. 17

Scarcity Services Tasks that are performed for someone else Sometimes referred to as “intangible goods” 18

Wants and Needs Needs Wants To economists, the term need is not definable. Wants Goods and services on which we place a positive value People have unlimited wants. 20

Scarcity, Choice, and Opportunity Cost The highest-valued, next-best alternative that must be sacrificed to attain something or satisfy a want 21

Scarcity, Choice, and Opportunity Cost In economics, cost is always a forgone opportunity. 23

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

The World of Trade-Offs Whenever resources are used for any activity, the user is sacrificing the opportunity to use those resources for other things. 26

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. 27

Production Possibilities Curve (PPC)

Production Possibilities Curve (PPC) 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? 29

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

The Choices Society Faces 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 30

The Choices Society Faces Technology Society’s pool of applied knowledge concerning how goods and services can be produced 31

Society’s Trade-Off Between Servers and HDTVs

Society’s Trade-Off Between Servers and HDTVs

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

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

The Law of Increasing Relative Costs

Economic Growth and the Production Possibilities Curve 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 37

Economic Growth Allows for More of Everything

The Trade-Off Between the Present and the Future The PPC can be used to illustrate the trade-off between present and future consumption. Consumption The use of goods and services for personal satisfaction 39

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

Capital Goods and Growth

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

Capital Goods and Growth Observations Forgo consumption goods to produce capital goods Increase in capital goods stimulates economic growth 43

Specialization and Greater Productivity Division of productive activities Leads to greater productivity 45

The Choices Society Faces Question How does the specialization of resources influence the shape of the production possibilities curve? 36

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

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 46

Specialization and Greater Productivity 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 47

Division of Labor Division of Labor Examples 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

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

Scarcity and the World of Trade-offs 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.