scarcity & ppf- micro economic

8/13/2019 Scarcity & PPF- Micro economic

1/23

INTRODUCTORYECONOMIC PRINCIPLES


2/23

Two Fundamental EconomicFacts

Society has Unlimited WantsConsumer goods & services are thosethings which satisfy consumer wants

Economic Resources are Limitedresources , inputs or factors of production

things which are used to produce goodsand services


3/23

Types of Resources

Land or Natural ResourcesLaborCapital

capital goods vs. consumer goods


4/23

Scarcity

The two fundamental assumptions implythat goods and services are scarce .Scarcity exists when not everyone canhave all that they want.If a good is scarce then it is:

desirablelimited


5/23

Economic Good vs. Free Good

Economic Good : a good which isscarceFree Good : a good which is not scarce

How can you tell if a good is scarce?

- if it has a PricePrice: the rate at which one goodexchanges for another; a ratio


6/23

If a good has a price ?it is an Economic Good (i.e. it is Scarce)

If it is a Free Good what about Price?its price is zero

Example of a Free Good : Air

Does a zero price its a Free Good? How common is Scarcity ?


7/23

Implications of Scarcity

Scarcity implies Competition.

Scarcity implies that you must chooseamong alternatives.

you cant have your cake and eat it too

theres no such thing as a free lunch

Life is filled with trade-offs.


8/23

Cost (Opportunity Cost)

Highest Valued Foregone Alternative

That is, the cost of action A is:of all of the other actions that you could

have taken (but can not because you

selected A) it is the one that you place

the greatest value upon.


9/23

Examples of Cost

Suppose that you can produce only twogoods, X and Y. What is the cost ofproducing more good X?Suppose that input a is used to producegood Z.

Good Z requires only input a.Input a has no other uses.

What is the cost of producing good Z?


10/23

What is the cost to society of havingnational defense?What is the major cost of youreducation?On June 14, 1994 David Letterman gave2 men tickets to the New York Rangersgame 7 play-offs. What was their costof going to the game?

How to increase the cost to a child ofbuying Nike Air Jordans.Gold Watch


11/23

Conclusions for Cost

Cost and Price are different concepts.Cost refers to an action, not a thing.

Although not every action has a benefit,every action does have a cost.The usefulness of Cost is in its ability topredict behavior.


12/23

Applications of Cost:Comparative Advantage

Consider two individuals, Gilligan andMary Ann, both of whom can either

catch fish or gather coconuts. Let thefollowing table represent the number ofhours that each person requires to

produce one unit of either fish orcoconuts.


13/23

Gilligan Mary Ann

CatchingFish

12 hours 4 hours

GatheringCoconuts

4 hours 2 hours


14/23

Who has the comparative advantage (low cost producer)in producing fish and who has the comparative

advantage in producing coconuts?

Fish: Gilligan: cost of 1 fish is 3 coconuts Mary Ann: cost of 1 fish is 2 coconuts

Coconuts: Gilligan: cost of 1 coconut is 1/3 fish Mary Ann: cost of 1 coconut is 1/2 fish


15/23

Production Possibilities Frontier

The PPF showsvariouscombinations of twogoods (such as Xand Y) that can beproduced.

It separates theattainable regionfrom theunattainable region.

0

2

4

6

8

10

0 2 4 6 8 1 0

Good X

G o o

d Y

PPF


16/23

The very existence of the curve impliesthe scarcity of resources.Where in the attainable region would theeconomy like to be?

Reasons for not being on the boundary: Unemployment : not using all of your resources Underemployment : resources not used to the bestof their ability


17/23

What could cause a shift in theProduction Possibilities Curve?

Change in the amount of resources.

Change in the technology of production.

Example: Consumer Goods vs. CapitalGoods PPF

The very existence of the curve impliesthe scarcity of resources.


18/23

Illustrating coston a Production

PossibilitiesCurve.

0

2

4

6

8

10

Good X

G o o d Y

PPF


19/23

Why is the Production PossibilitiesCurve concave to the origin?


20/23

Law of Increasing Marginal Cost

Marginal Cost is the change in total costfor one more unit ( D TC/ D Q)

The Law of Increasing Marginal Cost says that as you increase output themarginal cost increases .

This is true because inputs are imperfectsubstitutes.


21/23

Specialization

Because inputs are imperfect substitutesthey tend to specialize in production.

Specialization enhances production:It allows resources to do what they do best.Specialization allows repetition and

repetition enhances skills. (The more youdo something, the better at it you become.)

Example: My marriage.


22/23

Guides to Economic Thinking

Test a theory by its predictionsSecondary or indirect effects areimportantScarcity is pervasive and scarcity

Cost


23/23

Principle of Self Interest: people act intheir own interest

decision makers compare cost andbenefits of their actions

Decisions are made at the margin

Information is scarceValue is subjective

scarcity & ppf- micro economic

Documents