Scarcity and the World of TradeOffs

1
Chapter 2

• Scarcity and the Worldof Trade-Offs

2
Introduction
3
Learning Objectives

• Evaluate whether even affluent people face the
  problem of scarcity
• Understand why economists consider wants but not
  needs

4
Learning Objectives

• Explain why the scarcity problem induces
  individuals to consider opportunity costs
• Discuss why obtaining increasing increments of
  any particular good entails giving up more and
  more units of other goods

5
Learning Objectives

• Explain why society faces a trade-off between
  consumption goods and capital goods
• Distinguish between absolute and comparative
  advantage

6
Chapter Outline

• Scarcity
• Wants and Needs
• Scarcity, Choice, and Opportunity Cost
• The World of Trade-Offs
• The Choices Society Faces

7
Chapter Outline

• Economic Growth and the Production Possibilities
  Curve
• The Trade-Off Between the Present and the Future
• Specialization and Greater Productivity

8
Chapter Outline

• The Division of Labor
• Comparative Advantage and Trade Among Nations

9
Did You Know That

• The typical worker who commutes by car spends
  more than 50 hours a year stuck in traffic?
• You could calculate the cost of this lost time by
  figuring the earnings lost as traffic delays take
  time away from being on the job?

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Scarcity

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

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Scarcity

• What scarcity is NOT
• It is not a shortage.
• It is not the same thing as poverty.

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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

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Scarcity

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

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Scarcity

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

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Scarcity

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

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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.

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Scarcity

• Services
• Tasks that are performed for someone else

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Scarcity

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

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Wants and Needs

• Needs (from the economic perspective)
• Are objectively undefinable
• Could be a wish, want, or a life-saving necessity
• Wants
• Desirable things that people wish to have
• People have unlimited wants

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Scarcity, Choice, and Opportunity Cost

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

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Scarcity, Choice, and Opportunity Cost

• Questions
• What is the opportunity cost of attending this
  economics class?
• What is the opportunity cost of attending a
  Rolling Stones concert?
• What is the opportunity cost of increasing
  research for an AIDS vaccine?

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Scarcity, Choice, and Opportunity Cost

• In economics, cost is always a forgone
  opportunity.

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Scarcity, Choice, and Opportunity Cost
Limited Resources Unlimited Wants
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E-Commerce Example Making the Move to College

• There is a commercial website offering for sale
  all of the items commonly used to furnish dorm
  rooms.
• You can order the items online and then have them
  delivered to your dorm.
• What criteria would you use in making the choice
  of whether to purchase and transport the items
  yourself or have them provided by this web-based
  enterprise?

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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.

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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.

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ProductionPossibilities Curve (PPC)
Figure 2-1
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ProductionPossibilities 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?

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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 thetime period

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The Choices Society Faces

• Technology
• Societys pool of applied knowledge concerning
  how goods and services can be produced

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Societys Trade-Off Between Digital Cameras and
Pocket PCs
Figure 2-2, Panel (a)
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Societys Trade-Off Between Digital Cameras and
Pocket PCs
Figure 2-2, Panel (b)
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The Law of Increasing Relative Costs
Figure 2-3
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International Example

• Why did the town of Le Lavandou, France, make it
  illegal to die within city limits unless you
  owned a cemetery plot?
• This law reflected the decision of the
  townspeople not to allocate any more land for the
  use of cemeteries.
• In effect, they were choosing a point on the
  production possibilities curve with respect to
  the use of one scarce resource land.

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The Choices Society Faces

• Law of Increasing Relative Costs
• As society attempts to produce more of a good,
  the opportunity cost of additional units of that
  good generally increases.

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The Choices Society Faces

• Question
• How does the specialization of resources
  influence the shape of the production
  possibilities curve?

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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

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Economic Growth Allows for More of Everything
Figure 2-4
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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

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Capital Goods and Growth

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

Capital Goods per Year
A
B
8
7
Consumption Goods per Year ( trillions)
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Capital Goods and Growth
Future growth as a result of A on the left-hand
diagram
Capital Goods per Year
Recreation per Year
A
Today
B
8
7
Consumption Goods per Year ( trillions)
Food per Year
Figure 2-5, Panel (a)
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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)
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Capital Goods and Growth

• Observations
• Forgo consumption goods to produce capital goods
• Increase in capital goods stimulates economic
  growth

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Capital Goods and Growth

• Observations
• In the future the economic system can produce
  more consumer goods
• An increase in capital goods will lead to a
  higher rate of economic growth in the future

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Specialization and Greater Productivity

• Specialization
• Division of productive activities
• Leads to greater productivity

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Specialization and Greater Productivity

• Absolute Advantage
• The ability to produce more units of a good or
  using a given quantity of labor or service
  resource inputs

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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

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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

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Comparative Advantageand Trade Among Nations

• Question
• Why trade?
• Answer
• Comparative advantage and specialization
  increases output and income

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International Example Comparative Advantage in
Dishwasher Production

• Maytag dishwashers assembled in Jackson,
  Tennessee contain components manufactured
  throughout the world.
• Some consumers may consider it a plus to buy an
  appliance that is 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 US borders as well.

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Issues and ApplicationsThe Trade-off Between
Fighting Terrorism and Catching Bank Robbers

• FBI resources have been reallocated from
  combating white-collar crime, kidnappings, and
  illegal drugs towards fighting the terrorist
  threat.
• This shift is subject to the law of increasing
  relative cost.
• As more law enforcement resources are directed
  towards counterterrorism efforts, the opportunity
  cost in terms of traditional law enforcement
  rises.

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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

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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

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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.

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Summary Discussion of Learning Objectives

• Absolute versus comparative advantage
• One finds ones absolute advantage by producing
  more of a specific good than someone else who
  uses the same amount of resources.
• One finds ones comparative advantage by looking
  at the activity that has the lowest opportunity
  cost.

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End of Chapter 2

• Scarcity and the Worldof Trade-Offs