Appendix A
What’s in Economics
for You?
LEARNING OBJECTIVES
A.1
Explain scarcity and describe why you must
make smart choices among your wants
A.2
Define and describe opportunity cost
A.3
Describe how comparative advantage,
specialization, and trade make us all better off
A.4
Explain how markets connect us all using the
circular flow of economic life
A.5
Illustrate and explain the Three Steps to Smart
Choices
ARE YOU GETTING ENOUGH?
SCARCITY AND CHOICE
Because you can never satisfy all of your wants,
making the most out of your life requires
smart choices about what to go after,
and what to give up.
SCARCITY AND CHOICE
 Problem of scarcity arises because of limited money,
time, and energy
 Resources can produce only a fraction of the goods
and services desired by people
 Scarcity implies the need for choice.
 Every choice has an associated cost -- opportunity cost
 Opportunity cost is defined as the benefit given up
by not using resources in the best alternative way.
Consider the choice that must be made by a child who has only 50 cents to
spend.
Quantity of Bubble Gum
10
Unattainable
•A
8
6

Bubble gums cost 5 cents each
and lollipops cost 10 cents
each.

4
She wishes to spend it all on
two types of candy.
Attainable
2
3 4
5
Quantity of Lollipops
Combination A is unattainable.
Quantity of Bubble Gum
Combination B is attainable.
10
Unattainable
8
6
4
•A

B 

The opportunity cost of getting
1 more lollipop is the 2 bubble
gums that must be given up.
Attainable
2
The negatively sloped line
provides a boundary between
attainable and unattainable
combinations.
3
4
5
Quantity of Lollipops
Quantity of Civilian Goods
The Production Possibility Boundary
The PPB illustrates:
Unattainable
• scarcity
combinations
• choice
• d
• opportunity cost
• a
PPB
Point d shows scarcity; it is
unattainable with current
resources.
• c
• b
Attainable
combinations
Quantity of Military Goods
Points a and b show choice. They
are both attainable, but which one
will be chosen?
The negative slope illustrates
opportunity cost.
GIVE IT UP FOR OPPORTUNITY COST
Opportunity cost is the single most important concept
both in economics and for making smart choices in life.
OPPORTUNITY COST
• Every choice involves a trade-off, you have to give
up something to get something else
• True cost of any choice is the opportunity cost,
cost of best alternative given up
• For a smart choice, value of what you get must be
greater than value of what you give up
GAINS FROM TRADE
Opportunity cost and comparative advantage
are key to understanding why specializing and trading
make us all better off.
GAINS FROM TRADE
 With voluntary trade, each person feels what they
get is better than what they give up
 Absolute advantage
ability to produce at lower absolute cost
 Comparative advantage
ability to produce at lower opportunity cost
 Opportunity cost =
Give Up
Get
 Comparative advantage key to mutually beneficial
gains from trade
 Trade makes individuals better off when each
 specializes in producing product/service
with comparative advantage
(lower opportunity cost)
 trades for the other product/service
Fig. A.1
Jacqueline's Production Possibilities
Bread
Wood
(loaves)
(cords)
50
0
40
20
30
40
20
60
10
80
0
100
Fig. A.2
Samantha’s Production Possibilities
Bread
Wood
(loaves)
(cords)
40
0
30
5
20
10
10
15
0
20
Fig. A.3
Opportunity Cost for Jacqueline & Samantha
Opportunity Cost of 1 Additional
Loaf of Bread
Cord of Wood
Jacqueline
Gives up 2 cords wood
Gives up 1/2 loaf bread
Samantha
Gives up 1/2 cord wood
Gives up 2 loaves bread
Comparative Samantha lower
Jacqueline lower
Advantage
opportunity cost
opportunity cost
bread-making
wood-chopping
Even if one individual has absolute advantage
in producing everything, differences in
comparative advantage allow mutually
beneficial gains from specializing and trading
CHOOSING YOUR WAY
THE CIRCULAR FLOW OF ECONOMIC LIFE
The circular-flow diagram of economic life
is a map showing how markets connect us all.
It illustrates how smart choices by households,
businesses, and governments interact in markets.
THE CIRCULAR FLOW OF ECONOMIC LIFE
 All the complexity of the Canadian economy
can be reduced to three sets of players —
households, businesses, and governments
o in input markets —
households are sellers and businesses are buyers
o in output markets —
households are buyers and businesses are sellers
o governments set rules of the game and can
choose to interact in any aspect of economy
continued…
• Microeconomics
analyzes individual choices in households,
businesses and governments
• Macroeconomics
analyzes performance of the whole Canadian
economy and global economy
WEIGH MARGINAL BENEFITS & COSTS
• Three Keys to Smart Choices
1 Choose only when additional benefits are
greater than additional opportunity costs
2 Count only additional benefits and additional
opportunity costs
3 Be sure to count all additional benefits and
costs, including implicit costs and externalities
• Marginal benefits
additional benefits from next choice
• Marginal opportunity costs
additional opportunity costs from next choice
• Implicit costs
opportunity costs of investing your money or time
• Negative (or positive) externalities
costs (or benefits) that affect others external to
a choice or a trade
ECON100: Chapter 1A
January 14, 2013
The problem of scarcity
a) exists because all human wants cannot be satisfied
with limited time, money and energy
b) would disappear if we did not have to make choices
c) can be solved in a market economy
d) exists because the limited human expectations
cannot be satisfied with available knowledge
Which of the following is one of the three steps
to smart choices?
a) The choice is smart when benefits are greater
than additional opportunity costs
b) The choice is smart when total benefits are
greater than total costs
c) The choice is smart when measurable
benefits are greater than measurable costs
d) Be sure to count all benefits and costs,
excluding implicit costs or externalities
The main implication of scarcity in economics is
that people must
a) be unhappy
b) make choices
c) be selfish
d) not be selfish
The circular flow diagram of economic life shows
a) output markets where businesses are buyers and
households are sellers
b) input markets in which households are sellers and
businesses are buyers
c) input markets in which businesses are sellers and
households are buyers
d) input and output markets in which the
government determines sellers and buyers
Microeconomics
a) is scientific in its approach, while macroeconomics is not
b) analyzes the consequences of small changes in economic
choices; macroeconomics analyzes the consequences of
large changes in economic choices.
c) analyzes the choices of individual economic units;
macroeconomics analyzes the performance of overall
economy
d) analyzes the performance of overall economy;
macroeconomics analyzes choices of individual
economic units