1. 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.

2. Scarcity
Scarcity
Occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants 10

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

4. 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

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

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

7. 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

8. 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

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

10. 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

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

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

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

14. 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

15. 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

16. Production Possibilities Curve (PPC)

17. 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

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

19. 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

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

21. Society’s Trade-Off Between Servers and HDTVs

22. Society’s Trade-Off Between Servers and HDTVs

23. 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

24. 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

25. The Law of Increasing Relative Costs

26. 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

27. Economic Growth Allows for More of Everything

28. 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

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

30. Capital Goods and Growth

31. 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)

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

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

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

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

36. 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

37. 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

38. 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

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

40. 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.