SCARCITY
THERE IS NEVER ENOUGH OF ANYTHING
TO SATISFY ALL THOSE WHO WANT IT
Unlimited
vs.
Limited
Goods
Resources
Wants
Services
Choices
Must
Be
Made
Factors of
Production
Economic Wants SATISFIED
Goods
Tangible items that satisfy our wants; cars, TVs, computers,
clothes, etc.
Consumer
Goods
Goods for immediate consumptions that
satisfy our wants directly
Capital Goods that satisfy our wants indirectly; goods used to
produce other goods
Goods
Services
Intangible items such as:
Legal advice/representation
Medical and dental work
Tax preparation
Painting and repair work
House cleaning
All Resources are Scarce:
This means choices must be made
All goods are services are scarce because the
resources used to produce them are scarce
resources a.k.a. The Factors of Production
1. Land
Natural resources, acreage, ports, oil, minerals,
rivers
- coal, oil, water, fossil fuels, etc.
- vegetation and water – sun, wind, and rain
2. Labor
Human resources (physical and intellectual)
3. Capital (a product of Investment)
•Physical- All manufactured goods & services used in producing
consumer goods. Examples: Tools, machinery, equipment, trucks to
carry goods, airplanes, etc.
•Human- training and education
•Real (can produce something directly)
•Financial (money, stocks, bonds)
4. Entrepreneurs: use Factors of Production
•decide how to combine resources to create new goods and services.
•Anyone who opens a business, large or small, is an entrepreneur.
•willing to take risks.
•develop new ideas, start businesses, and, if they are successful, even create new
industries.
•By producing new goods and services and hiring workers, they fuel economic growth.
Entrepreneurs combine the other three Factors of Production to produce goods and
services.
More…
Factors of Production
Education and training increase
human capital. Employers,
workers, and consumers benefit
when job training improves
productivity.
Quiz: Scarcity Means Making Choices
What is the term used to describe a temporary low supply of a good or service?
A. need
B. scarcity
C. shortage
D. want
Quiz: Entrepreneurs Use Factors of Production
Someone taking a course in Web design is affecting what factor of production?
A. entrepreneurship
B. human capital
C. land
D. physical capital
Quiz: All Resources Are Scarce
Which of these would be an alternative use for farmland?
A. an amusement park
B. farm machinery
C. skilled labor
D. cash
OPPORTUNITY COST AND
TRADE-OFFS
Making Decisions
You are cleaning your bedroom. Books,
clothes, and other items cover your
bed, the floor, the entire room.
Suddenly, your phone rings, and a
friend invites you to a party.
You consider your options and quickly
decide that going to the party will be
more fun than cleaning your room.
• Individual Decisions- your decisions
• Business Decisions- resource use
• Government Decisions- allocation of resources (guns v. butter)
Vs.
Opportunity Cost
• We all have the same amount of hours in the
day, but we all choose different ways to spend
our time.
• Opportunity Cost determines these choices.
• Each Choice has a value placed on it.
VS.
When you choose phone A over phone B, you
are saying you value phone A more than phone
B.
Opportunity Cost of that choice is what you
gave up to get phone A (Op Cost= phone B, or
the value of the opportunity lost.)
No matter what we do with our time or resources, we always incur opportunity cost.
• Value = Benefits + Costs
• In Economics, we look at
the cost and benefits to
make a better choice.
• The greatest Benefit and
lowest Cost= better choice
Opportunity Cost
Like many important
choices, the decision to
go to college involves
trade-offs. As college
costs have become more
expensive, those tradeoffs have become harder
for many students.
Value
Benefits
Cost
OPPORTUNITY COST
Thinking at the Margin
Many decisions involve adding or
subtracting one unit, such as one
hour or one dollar.
From an economist’s point of view,
when you decide how much more or
less to do, you are Thinking at the
Margin.
Businesses analyze their marginal costs when making decisions about production. As long as the marginal
benefit is greater than the marginal cost, this manufacturer will produce more toys.
Jane decides to wake up
two hours earlier to study
with the expectation of
raising her grade to a B.
Analyze Charts. Do
you agree with that
decision? Why or
why not?
Marginal Analysis
• Marginal benefit – the benefit derived from producing an additional unit(s) of
product
• Marginal cost – the cost derived from producing an additional unit(s) of product
• Will produce as long as MB = MC (in order to maximize satisfaction of wants).
• If MC >MB, production has exceeded society’s desire for the good (allocative
inefficiency – over-allocation of resources)
• If MC < MB, under-allocation of resources exists.
Quiz: Making Decisions
Why do individuals, businesses, and governments
make trade-offs?
A. to make more money
B. because resources are limited
C. because large groups of people cannot easily make
decisions
D. to promote their values
Quiz: Opportunity Cost
Which statement best describes opportunity cost?
A. Opportunity cost is the value in dollars of a trade-off.
B. Opportunity cost is the best choice in a decision.
C. Opportunity cost is the best alternative decision.
D. Opportunity cost is all the alternatives not chosen in a decision.
Quiz: Opportunity Cost
Which statement best describes opportunity cost?
A. Opportunity cost is the value in dollars of a trade-off.
B. Opportunity cost is the best choice in a decision.
C. Opportunity cost is the best alternative decision.
D. Opportunity cost is all the alternatives not chosen in a decision.
“It is not from the benevolence of the butcher, the brewer, or the
baker that we expect our dinner, but from their regard to their
own interest.”
-Adam Smith
PRODUCTION POSSIBILITIES
CURVES
How people and nations should decide…
X
• What goods to produce
• How much to produce
• For whom
Y
ASSUMPTIONS OF A PPC
• Only two products can be produced
• All resources are fixed
• Resources are land, labor, capital and entrepreneurship
• All technology is fixed
• All resources are used fully and efficiently
• Scarcity is a constraint included
• Ceteris paribus: all else remains equal
All possible combinations of how to produce these two goods are on the curve
X
Y
The Whole Point is Economic Efficiency: Obtaining the maximum output from
available resources, or the maximum benefits at minimum cost from our limited
resources.
POINTS OF THE PPC
3
Vs.
E
A
B
2
G
U
N 1
S
F
0
BUTTER
C
1
2
3
D
• On the curve:
-- means full and efficient use of resources
-- we are using everything we have and not wasting anything
• Under the curve:
–Inefficient use of resources- called unemployment of resources
–We are wasting resources- there can be unemployment of any resource not
just labor.
• Above the curve:
–Not possible given the resources available- This is unobtainable
–The only way to reach the point above the curve is to shift the curve
outward to reach the point
PPC SHIFT
• The PPC can shift to the right or left.
• Shift right when we discover new resources
or technology
• This will move the curve closer to point
E
• Shift left when resources are destroyed or
technology decreases
• Anything that causes economic output to
increase or decrease will shift the curve.
A
3
E
B
G 2
U
N
S 1
C
F
0
1
BUTTER
2
D
3
SO WHAT ABOUT OPPORTUNITY COST…
• If we move from
point D to point C
what is the
opportunity cost?
• If we move from
point C to point B?
• If we move from
point B to point A?
3
A
E
B
2
G
U
1
N
S
C
F
0
1
BUTTER
2
3
D
Constant Cost
$5 A
B
4
• What would a
PPC look like if it
had constant
cost?
G
Hamburgers 3
We call this a
budget line.
2
C
H
D
E
1
1
2
3
Hotdogs
F
4 $5
Which is better to have a point below the curve or to shift to the left?
• When there is a point below the curve, the resources
are still available, but not being used.
• When we shift to the left (below) the PPC, the
resources have been destroyed.
• If you are below the curve you lost your job, when you
shift to the left you have died. Which is better?
What is the Point?
Economic Goal: Growth
• Increasing amount of goods and services which are in demand
• When the economy grows, given its constraints, we can produce more and the
PPC will shift outwards to the right.
Why do we Care?
Movement along the curve is efficient and at capacity, producing the most at the least
cost and there is a trade-off to produce more or less of any two objects.
Great Depression:
Economy was inside the curve
Unemployment was up and Production was down.
WWII:
Economy was on the curve
Production was up , but still at capacity, we were not exceeding our
scarcity limitations.
Quiz: Production Possibilities
Drawing a production possibilities curve helps a
country’s economists determine
A. which goods the country can produce.
B. which resources should be used to produce goods.
C. how the production of one good affects the
production of another.
D. how many factories and how much farmland the
country should have.
Quiz: Changing Production Possibilities
The points on a production possibilities frontier all
represent
A. the efficient use of resources.
B. the cost of using resources.
C. underutilization of resources.
D. different types of resources.