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2. Economics and Scarcity
Economics deals primarily with scarcity
How we allocate limited resources to satisfy unlimited wants and needs
Resources
Land, labor, factory buildings, timber, minerals, machinery, and the like
The basis for producing the food, shelter, medical care, and luxury goods that we want
These resources are scarce in the sense that there are not enough of them to produce everything we need and desire
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3. Production Possibilities
In examining production possibilities, we must make these simplifying assumptions about our economy
All available resources will be used fully
All available resources will be used efficiently
The quantity and quality of available resources are not changing during our period of analysis
Technology is not changing during our period of analysis
We can produce only two goods with our available resources and technology
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4. Production Possibilities Table
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5. Production Possibilities Curve
Shows the maximum amounts of two different goods that can possibly be produced during any particular time period using society’s scarce resources
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6. Production Possibilities Curve
Illustrates
Opportunity cost
The best alternative that is forgone in order to produce or consume something else
Unemployment
A situation in which resources are not fully used in production
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7. Economic Growth
May occur if the quality or quantity of society’s resources increases, or if new technologies are developed so that we can produce more output with our available resources
Reflected in an outward shift of the entire production possibilities curve
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8. Goods and Services Services Goods
Activities such as haircuts, health care, and education that are consumed (used) by consumers
Goods
Consumer goods
Consumed (used) by consumers
Capital goods
Used to produce other goods
Private goods
Produced by business firms
Public goods
Provided or paid for by government
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9. Law of Demand
Usually stated as follows: price and quantity demanded are negatively related, all other things equal
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10. Demand Schedule
A table showing the quantities that consumers are willing to buy at alternative prices during a specified time period
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11. Demand Curve
A graph showing the quantities that consumers are willing to buy at alternative prices during a specified time period
The demand curve is downward sloping, reflecting the law of demand
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12. Law of Supply
Usually stated as follows: price and quantity supplied are positively related, all other things equal
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13. Supply Schedule
A table showing the quantities that suppliers are willing to sell at alternative prices during a specified time period
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14. Supply Curve
A graph showing the quantities that suppliers are willing to sell at alternative prices during a specified time period
The supply curve is upward sloping, reflecting the law of supply
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15. Putting Demand and Supply Together
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16. Putting Demand and Supply Together (cont.)
Equilibrium
A state of balance; a point at which quantity demanded equals quantity supplied
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17. Shortage vs. Surplus Shortage Surplus
Quantity demanded is greater than quantity supplied
The price is lower than the market level
Surplus
Quantity supplied is greater than quantity demanded
The price is higher than the market level
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18. Shifts in Demand and Supply
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19. Shifts in Demand and Supply (cont.)
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20. Shifts in Demand and Supply (cont.)
Demand curves shift if:
The number of buyers changes
Consumers’ incomes change
Consumers’ tastes change
The prices of other goods that the consumers regard as substitutes or complements change
Supply curves shift if:
The number of sellers changes
The factors that affect the producers’ (sellers’) costs change
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21. Real-World Factors That Cause Shifts
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22. Efficiency and Equity Efficient Equity
Using resources in such a way as to maximize the desired output
Equity
Fairness
The market is often efficient, but not necessarily equitable
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23. Public Goods and Services
Have unique characteristics that make it unlikely that the market will provide enough of them
Government often provides them
Most economists agree that the provision of public goods and services is an appropriate role for government
Concerned with just what goods and services these will be, and how much of them we want
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24. Spillovers
Occur when some cost (or benefit) related to production or consumption “spills over” onto people not involved in the production or consumption of the good
Environmental pollution is the most obvious example of a spillover cost to society
Education provides significant spillover benefits to society
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25. Equity Issues of equity: Discrimination Poverty
Inequality of income distribution
Housing
Health care
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26. Market Power and Trade Market power
Ability to influence market price of a product
Competition protects us from unreasonable prices
Pure competition
A market in which many independent producers compete to sell a standardized product to many independent buyers
International trade enhances competition and reduces market power
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27. Special Markets
Markets for some products are often considered too important to be left alone to the marketplace
Housing
Health care
Agriculture
Care of the elderly
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28. Stability
Because prices and employment tend to fluctuate, our market economy is inherently unstable
Inflation
A rise in the average price level in the economy
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29. Microeconomics vs. Macroeconomics
Deals with individual activity within the economy
Distribution of income within the country
Nature of individual markets such as agriculture
Macroeconomics
Deals with the economy as a whole
Total income
Total output in the economy
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30. The Economic Left and the Economic Right
THE ECONOMIC LEFT (Liberal)
The Extreme Left
Pure Socialism
Characteristics
Government ownership of land and capital
Government economic decision making
Values
Equity
Goal
More government in the economy
THE ECONOMIC RIGHT (Conservative)
The Extreme Right
Pure Capitalism
Characteristics
Private ownership of land and capital
Private economic decision making
Values
Efficiency
Goal
Less government in the economy
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31. Appendix: Increasing Opportunity Costs
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