chapter 2: scarcity and the world of trade-offs econ 152 – principles of microeconomics materials...
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Chapter 2:
Scarcity and the World of Trade-offs
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
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ScarcityOccurs when the ingredients (resources) for
producing things that people desire are insufficient to satisfy all wants
Scarcity
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What scarcity is NOT: It is not a shortage. It is not the same thing as poverty.
Scarcity
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ProductionAny 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
Scarcity
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Resources or Factors of ProductionLand
Natural resources or the gifts of nature
Labor The human resource
Scarcity
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Resources or Factors of ProductionPhysical Capital
All manufactured resources
Human Capital Accumulated training and education
of workers
Scarcity
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Resources or Factors of ProductionEntrepreneurship
Person who organizes, manages, and assembles the other resources
Risk taker Maker of basic business policy decisions
Scarcity
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Goods versus Economic GoodsGoods are all things from which individuals
derive satisfaction and are, thus, valued.Economic goods are goods and services
produced from scarce resources.
Scarcity
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ServicesTasks that are performed for someone elseSometimes referred to as “intangible goods”
Scarcity
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Wants and Needs
Needs To economists, the term need is not definable.
WantsGoods and services on which we place a
positive value
People have unlimited wants.
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Opportunity CostThe highest-valued, next-best alternative that
must be sacrificed to attain something or satisfy a want
Scarcity, Choice, and Opportunity Cost
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In economics, cost is always a forgone opportunity.
Scarcity, Choice, and Opportunity Cost
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Limited Resources & Unlimited Wants
Scarcity
Choices
Opportunity Cost
Scarcity, Choice, and Opportunity Cost
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Whenever resources are used for any activity, the user is sacrificing the opportunity to use those resources for other things.
The World of Trade-Offs
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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.
The World of Trade-Offs
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ProductionPossibilities Curve (PPC)
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QuestionsWhat 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?
ProductionPossibilities Curve (PPC)
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PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs
At the individual level
At the societal level
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Production possibilities assumptionsResources are fully employedProduction is for a specific time periodResources are fixed for the time periodTechnology does not change over the
time period
The Choices Society Faces
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TechnologySociety’s pool of applied knowledge
concerning how goods and services can be produced
The Choices Society Faces
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Society’s Trade-Off Between Servers and HDTVs
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Society’s Trade-Off Between Servers and HDTVs
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Efficiency
The case in which a given level of inputs is used to produce the maximum output possible
Alternatively, the situation in which a given output is produced at minimum cost
The Choices Society Faces
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Inefficient PointAny point below the production possibilities
curve at which the use of resources is not generating the maximum possible output
Law of Increasing Relative CostAs 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
The Choices Society Faces
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The Law of Increasing Relative Costs
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Economic growth Increases the production possibilities
of digital cameras and pocket PCsOccurs over a period of time Is illustrated by an outward shift
of the production possibilities curve
Economic Growth and the Production Possibilities Curve
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Economic Growth Allows for More of Everything
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The PPC can be used to illustrate the trade-off between present and future consumption.
ConsumptionThe use of goods and services
for personal satisfaction
The Trade-Off Between the Present and the Future
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Consumer goods Goods produced for
personal satisfaction
Capital goods Goods used to produce
other goods
Capital Goods and Growth
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Capital Goods and Growth
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Cap
ital G
oods
per
Yea
r
Consumption Goods per Year($ trillions)
C
Capital Goods and Growth
B
A
Future growth as a result of C on the left-hand diagram
Today
Rec
reat
ion
per
Yea
r
Food per Year
Figure 2-5, Panel (b)
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ObservationsForgo consumption goods to produce capital
goods Increase in capital goods stimulates economic
growth
Capital Goods and Growth
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SpecializationDivision of productive activitiesLeads to greater productivity
Specialization and Greater Productivity
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QuestionHow does the specialization of resources
influence the shape of the production possibilities curve?
The Choices Society Faces
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In general, the more specialized the resources, the more bowed the PPC
Specialization and Greater Productivity
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Specialization and Greater Productivity
Absolute Advantage
The ability to produce more units of a good or service using a given quantity of labor or resource inputs
Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs
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Comparative AdvantageThe ability to produce a good
or service at a lower opportunity costA relative conceptSpecialize in the production
for which we have a comparative advantage
Specialization and Greater Productivity
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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
Division of Labor
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QuestionWhy trade?
AnswerBoth participating countries benefitComparative advantage and specialization
increases output and income of both
Comparative Advantageand Trade Among Nations
Chapter 2:
Scarcity and the World of Trade-offs
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.