Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved. Contemporary Economics: An Applications Approach By Robert J. Carbaugh 3rd Edition Chapter 1: Scarcity and Choice

Carbaugh, Chap. 1 2 Opportunity cost and choice Scarcity and Opportunity Cost Number of compacts Number of minivans D C B A E Car wash possibilities

Carbaugh, Chap. 1 3 Production possibilities curve Possible combinations of computers and VCRs Computers (mill.) Opportunity Cost A B C D Production possibilities curve (PPC) Points along PPC imply no unemployed resources and efficient production Attainable and unattainable production combinations Computers (mill.) A B C D Production possibilities curve (PPC) inefficient unattainable F E Foregone output VCRs (millions)

Carbaugh, Chap. 1 4 Law of increasing opportunity cost Opportunity Cost Computers (mill.) A B C D A bowed outward PPC illustrates increasing opportunity costs VCRs (millions)

Carbaugh, Chap. 1 5 Changes in the PPC Economic growth & the PPC Computers (mill.) G F C E Economic growth is illustrated by an outward shift in a nation’s PPC PPC 1 PPC VCRs (millions)

Carbaugh, Chap. 1 6 Consumption trade-offs & growth United States Consumer goods (hamburgers) Economic Growth A Next year's production possibilities This year's production possibilities PPC 1 PPC 0 The US choice to produce more consumer goods (point A) limits future production growth Japan Consumer goods (hamburgers) A Next year's production possibilities This year's production possibilities PPC 1 PPC 0 Japan's choice to favor capital goods (point A) will shift its future PPC farther out Capital Goods (machinery)

Carbaugh, Chap. 1 7 Economic Growth Investment and consumption Investment as aConsumption as a Nationpercentage of GDPpercentage of GDP Brazil19%60% Canada2057 China3747 Germany2059 Japan2656 Mexico2068 Russia1851 South Korea2759 Sweden1751 United States1669 Investment and consumption as a share of Gross Domestic Product, 2001 Investment defined as gross fixed capital formation. Source: IMF

Carbaugh, Chap. 1 8 Opportunity cost of national security Economic Growth Security Goods F PPC 0 PPC 1 G E Nonsecurity Goods

Carbaugh, Chap. 1 9 Economic sanctions Economic Growth Iraq Machines A (before sanctions) (after sanctions) PPC 1 PPC 0 Oil (barrels)

Carbaugh, Chap Revised grading standard GPA Higher grading standard Shifting relationships Initial grading standard GPA Reading Tables & Graphs H J I K Run = 2 Rise = 1 Lower grading standard Hours of study time per week Hours of study time per week

Carbaugh, Chap Fundamental economic questions Economic Systems Scarcity Fundamental economic questions: - What to produce? - How to produce? - For whom to produce? Type of economic system: - Market economy - Command economy - Mixed economy Imposes Answered by

Carbaugh, Chap Economic Systems Market economy: circular flow model Resource markets Product markets Business firms Land, labor, capital and entrepreneurship Rent, wages, interest and profits Households Consumption expenditures Goods and services