Carlos A Rodriguez Herrera 1 31 23 Principles of Macroeconomics ECON 2002 01 Chapter 2 Scarcity and the World of Trade Offs Introduction Suppose that you are a passenger on an airline flight and the captain announces an early arrival at your destination Immediately you begin to contemplate how you might use that extra hour But soon enough you hear the bad news there are no empty gates and you will have to wait at least an hour to exit the plane As you abandon your plans for that extra hour you realize that you have incurred an opportunity cost In this chapter you will learn how opportunity costs affect economic decisions Learning Objectives Evaluate whether even affluent people face the problem of scarcity Understand why economists consider wants but not needs Discuss why obtaining increasing increments of any particular good entails giving up Explain why the scarcity problem induces individuals to consider opportunity costs more and more units of other goods Explain why society faces a trade off between consumption goods and capital goods Distinguish between absolute and comparative advantage Chapter Outline Scarcity Wants and Needs Comparative Advantage and Trade Among Nations Scarcity Choice and Opportunity Cost The World of Trade Offs The Choices Society Faces Economic Growth and the Production Possibilities Curve The Trade Off Between the Present and the Future Specialization and Greater Productivity Production Possibilities Curve Frontier 1 Scarcity Trade Offs 2 Law of Increasing Opportunity Costs The more you want of anything the more you ll have to give up of other things 3 A Perfectly Efficient Economy Produces on the Curve Instead of Inside it 4 Economic Growth Means Pushing the Frontier Outward a Higher production b More skilled workers c Better ways to produce goods The Ohio State University 1 Carlos A Rodriguez Herrera 1 31 23 Scarcity Scarcity Is the most basic concept in all of economics Occurs when the ingredients for producing things that peoples desire are insufficient to satisfy all wants Means we never have enough of everything including time to satisfy our every desire Any activity that results in the conversion of resources into products that can be used in consumption What scarcity is NOT It is not a shortage It is not the same thing as poverty Production Resources Inputs that are used to produce things that people want Resources or Factors of Production Land Labor a Natural resources or the gifts of nature a The human resource a All manufactured resources Physical Capital Human Capital Entrepreneurship a Accumulated training and education of workers a Person who organizes manages and assembles the other resources b Risk taker c Maker of basic business policy decisions Goods versus Economic Goods Goods are all things from which individuals derive satisfaction or happiness Economic goods are scarce goods for which the quantity demanded exceeds the quantity supplied at zero prices Services Recall Tasks that are performed for someone else Can be referred to as intangible goods Scarcity occurs when the ingredients resources for producing things that people desire are insufficient to satisfy all wants Wants and Needs Needs Wants To economists the term need is not definable Goods and services on which we place a positive value People have unlimited wants Scarcity Choice and Opportunity Cost Opportunity Cost The highest valued next best alternative that must be sacrificed to obtain something or to satisfy a want The next highest ranked alternative not all alternative Questions The Ohio State University 2 Carlos A Rodriguez Herrera 1 31 23 What is the opportunity cost of attending this economics class What is the opportunity cost of attending a concert by your favorite band What is the opportunity cost of working out at the gym In economics cost is always a forgone opportunity The World of Trade Offs Whenever you engage in any activity using any resource you are trading off the use of that resource for one or more alternative uses The value of the trade off is represented by the opportunity cost that which you give up to obtain something else Graphical analysis of opportunity cost The production possibilities curve PPC represents all possible combinations of maximum outputs that could be produced assuming a fixed amount of productive resources of a given quality The Production Possibilities Curve PPC Trade offs What would happen if you were more interested in getting a higher grade in economics Holding a constant total study time What would happen to the PPC if you spent more time studying Straight line PPC Is it possible that the terms of the trade off might not be constant The Choices Society Faces PPC is used to demonstrate related concepts of scarcity choice and trade offs At the individual level At the societal level Production Possibilities Assumptions Resources are fully employed Production takes place over a specific time period Resources are fixed for the time period Technology does not change over the time period Technology Efficiency Inefficient Point Society s pool of applied knowledge concerning how goods and services can be produced Productive efficiency producing the maximum output with given technology and resources Alternative the situation in which a given output is produced at minimum cost Any point below the production possibilities curve at which the use of resources is not generating the maximum possible output Law of Increasing Additional 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 Resource are not perfectly adaptable for alternative uses In general the more specialized the resources the more bowed the production possibilities curve The Ohio State University 3 Carlos A Rodriguez Herrera 1 31 23 Economic Growth and the Production Possibilities Curve Economic Growth Increases the production possibilities of smart phones and tablet devices Over time it is possible to have more of everything Illustrated by an outward shift of the production possibilities curve The Trade Offs 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 Consumption Goods and Capital Goods A Trade Off Consumer Goods Capital Goods a Goods produced for personal satisfaction Capital Goods and Growth Observations a Goods used