3 The Fundamental Economic Problem Scarcity and Choice Our necessities are few but are wants are endless INSCRIPTION ON A FORTUNE COOKIE Contents Contents Scarcity Scarcity Choice Choice and and Opportunity Opportunity Cost Cost Scarcity Scarcity and and Choice Choice for for aa Single Single Firm Firm Scarcity Scarcity and and Choice Choice for for the the Entire Entire Society Society The The Concept Concept of of Efficiency Efficiency The The Three Three Coordination Coordination Tasks Tasks of of any any Economy Economy Copyright 2006 South Western Thomson Learning All rights reserved Contents Contents continued continued Specialization Specialization Fosters Fosters Efficient Efficient Resource Resource Allocation Allocation Specialization Specialization Leads Leads to to Exchange Exchange Markets Markets Prices Prices and and the the Three Three Coordination Coordination Tasks Tasks A ALast Last Word Word Don t Don t Confuse Confuse Ends Ends with with Means Means Copyright 2006 South Western Thomson Learning All rights reserved Scarcity Scarcity Choice Choice and and Opportunity Opportunity Cost Cost Scarcity Scarcity of of resources resources necessity necessity of of choices choices Opportunity Opportunity cost cost value value of of the the best best forgone forgone alternative alternative True True cost cost of of aa scarce scarce resource resource Copyright 2006 South Western Thomson Learning All rights reserved Opportunity Opportunity Cost Cost and and Money Money Cost Cost Opportunity Opportunity cost cost Closely Closely related related to to money money cost cost ifif markets markets are are well well functioning functioning No No explicit explicit prices prices for for some some valuable valuable resources resources e g e g time time Total Total cost cost money money cost cost opportunity opportunity cost cost Copyright 2006 South Western Thomson Learning All rights reserved Opportunity Opportunity Cost Cost and and Money Money Cost Cost Example Example of of opportunity opportunity cost cost aa firm firm that that produces produces two two outputs outputs with with aa fixed fixed supply supply of of inputs inputs More More of of one one output output less less of of the the other other output output Copyright 2006 South Western Thomson Learning All rights reserved Scarcity Scarcity and and Choice Choice for for aa Single Single Firm Firm Production Production Possibilities Possibilities Frontier Frontier Production Production possibilities possibilities frontier frontier aa graph graph showing showing different different combinations combinations of of output output for for aa given given amount amount of of inputs inputs More More of of one one good good less less of of another another Illustrates Illustrates opportunity opportunity costs costs in in production production Copyright 2006 South Western Thomson Learning All rights reserved TABLE TABLE 1 1 Production Production Possibilities Possibilities Open Open to to aa Farmer Farmer Copyright 2006 South Western Thomson Learning All rights reserved The The Production Production Possibilities Possibilities Frontier Frontier Negatively Negatively sloped sloped Slope Slope opportunity opportunity cost cost Illustrates Illustrates the the trade off trade off in in the the production production of of one one good good or or class class of of goods goods against against another another Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 1 1 PPF PPF for for Production Production by by Soybeans aa Single Single Farmer Farmer 40 30 20 A B Attainable region Unattainable region C D 10 0 10 20 30 38 Wheat E 52 60 65 Copyright 2006 South Western Thomson Learning All rights reserved The The Principle Principle of of Increasing Increasing Costs Costs Shape Shape concave concave Principle Principle of of increasing increasing costs costs production production of of one one good good opportunity opportunity cost cost of of producing producing another another unit unit Reason Reason Inputs Inputs tend tend to to be be specialized specialized Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 2 2 PPF PPF with with No No Specialized Specialized Resources Resources 50 Black Shoes 40 A B 30 C 20 D 10 0 10 20 30 40 50 Brown Shoes Copyright 2006 South Western Thomson Learning All rights reserved The The Principle Principle of of Increasing Increasing Costs Costs Productivity Productivity constant constant along along aa production production possibilities possibilities frontier frontier productivity productivity shift shift of of the the frontier frontier Skills Skills Technology Technology Capital Capital stock stock Copyright 2006 South Western Thomson Learning All rights reserved Scarcity Scarcity and and Choice Choice for for the the Entire Entire Society Society Resources Resources are are scarce scarce for for the the entire entire society society Choices Choices must must be be made made More More of of one one good good implies implies less less of of another another Production Production possibilities possibilities frontier frontier applicable applicable to to the the economy economy as as aa whole whole Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 3 3 PPF PPF for for Entire Entire Economy Economy Thousands of Automobiles per Year 700 B 600 D 500 E 400 G 300 F 200 100 C 0 100 200 300 400 500 Missiles per Year Copyright 2006 South Western Thomson Learning All rights reserved Scarcity Scarcity and and Choice Choice for for the the Entire Entire Society Society Economic Economic growth growth increase increase in in production production of of goods goods and and services services Trade off Trade off between between consumption consumption goods goods and and capital capital goods goods Investment Investment in in capital capital goods goods shifts shifts out out the the production production possibilities possibilities frontier frontier Copyright 2006 South Western Thomson Learning All rights reserved Growth Growth in in the the United United States States and and Asia Asia G N A Consumption Goods Next year s production possibilities This year s production possibilities F G Capital Goods a United States g Consumption Goods F Next year s production possibilities This year s production possibilities f B f g Capital Goods b Asia Copyright 2006 South Western Thomson Learning All rights reserved Scarcity Scarcity and and Choice Choice