Resources used for production such as labor, capital, land and entrepreneurial ability are scarce. Because of this scarcity, societies must make choices about how to allocate these scarce resources between different goods and services. This can be modeled using a Production Possibility Curve which shows the maximum possible output combinations of two goods an economy can produce with its available resources and technology. The steeper the slope of the PPC, the higher the opportunity cost of producing one good over another. Over time, a country's PPC may shift outward as its resources and technology improve, allowing it to produce more of both goods.

1. Confronting Scarcity:
Choices in Production
Slide 1 of 19
“The first lesson of economics is scarcity – there is never enough of
anything to fully satisfy all those who want it. The first lesson of politics
is to disregard the first lesson of economics.”
-Thomas Sowell

2. Scarcity…a real bummer.
In the previous module, we learned
that we face scarcity…but why?
Because the “stuff” we use to make
goods and services are scarce.
And by “stuff”, we mean the
‘factors of production’.
Slide 2 of 19

3. So what items are scare?
• Labor
– For example. there are about 150 million workers in the
U.S. That may seem like a lot but it is a finite limit.
• Natural resources
– The U.S. contains about 10 million sq km of land…again
a lot, but still limited.
• Capital
– A fancy name for equipment, money or other items used
in production…it too is limited.
Resources used to
make goods and
services are scarce.
There are three of these
resources including:
Slide 3 of 19

4. There is a fourth factor too
Entrepreneurial Ability
Ideas are also scarce. I wish I had
more of them and I bet you do too!
The fourth factor may be the
most important.
It is the idea…the spark…that
combines the other three factors
of production into something that
is useful.
Slide 4 of 19

5. Economics, in a nut shell
Because these
resources are scarce,
there are not enough of
them to satisfy all of our
wants and needs.
That means we have to make
choices, both as individuals and
as a society.
Economics is the study of
those choices – It analyzes
how we decide to use our
scarce resources.
Here we are seeing
several Key Learning
Outcomes. We now
see that resources
(such as land, labor,
capital and
entrepreneurial ability)
are scarce and
because of that we
have to make choices
based on opportunity
cost!
Slide 5 of 19

6. Because of scarcity, we have to
make choices
In the last module, we developed
a model to analyze these
choices for an individual.
Let’s turn our attention to these
choices from a societal
perspective.
Slide 6 of 19

7. The economizing problem, from
society’s point of view
We’ll now develop a model to explore choices
from a societal perspective.
That model is called the Production Possibility
Model.
Slide 7 of 19

8. Let’s turn to society’s choices
In exploring the Production Possibility Model, well discuss choices
between two goods: Guns and Butter.
Guns might represent
spending on defense. You do
want to protected, don’t you?
Economists love to use these as examples
because they represent something bigger.
Butter might represent spending
on welfare programs. You do
want to happy, don’t you?
Societies routinely have to make choices
between these two important goods! Slide 8 of 19

9. The Production Possibilities Model can
be used to analyze these choices
• We are discussing a hypothetical country
• Fixed resources
– The supply of resources in that country (i.e. factors of production) used
is limited in both quality and quantity
• Fixed technology
– Technology in that country does not change
• Two good model
– There are only two goods in the world (Ridiculous, I know but it keeps
things simple.)
– Let’s call them “Guns and Butter”
To set up the Production Possibilities Model, let’s make
some assumptions
Slide 9 of 19

10. …Now for the model
Assume we are talking about a hypothetical country
that can produce only two goods: Guns and butter.
Here are the production alternatives that they may face:
If this country makes
nothing but butter, it
can produce 20 units.
If this country makes
nothing but guns, it
can produce 4 units.
Or it, can produce
some combination of
the two.
Note how these
alternatives
look like XY
coordinates.
We can graph them!.
Slide 10 of 19

11. The production possibility curve (or frontier)
Here we see this
country’s
production
alternatives
displayed
graphically.
They, as a society,
can choose to
produce any
combination of
guns and butter up
to points on this
line.
Slide 11 of 19

12. The production possibility curve (or frontier)
Any point inside the PPC
means that resources are
unemployed.
When we hear
“unemployment”, we think
of labor. But this could
mean any resource.
Slide 12 of 19

13. We can explore Opportunity Cost from
society’s perspective too
Recall, opportunity cost is the most
desired goods or services that are forgone
in order to obtain something else.
In this model, its the amount of one good that must
be sacrificed to make one unit of another good.
In other words, “what does it
cost to make a gun, in terms
of butter.”
Slide 13 of 19

14. Let’s do the math
Notice…if you start at ‘A’ and
want to add 1 gun you must
give up 2 butter
But in order to add another
gun, you must give up 4
butter!
Study this pattern. I think
you’ll see that each time you
add another good, its
opportunity cost gets higher!
Slide 14 of 19

15. Notice, each additional unit costs more!
This illustrates the Law of
Increasing Opportunity Cost
The more of a product that is
produced, the greater is its
opportunity cost
This holds true in reality too.
As we continue to plant in
increasingly less fertile soil, crops
will not be as bountiful.
Slide 15 of 19

16. But over time, can’t we make more? YES
Over time, we might expect a
country’s Production
Possibility curve to expand.
That means that people can
have more of both guns and
butter.
Here, the burdens of scarcity
have been reduced.
These shifts could result from:
-Technological improvements
-Population growth or other
resource growth (e.g. land)
-Improvements in productivity
or efficiency
Slide 16 of 19

17. Real world example: factors that affect
the Production Possibility Curve
As a country’s population grows,
your production possibility curve
will likely increase (or shift out).
Most…but not all…countries
experience population growth.
Here we see the U.S. population
is growing by about 1% per year.
Some countries like Japan and
Russia have been experiencing
population declines. That does
not bode well for future economic
growth!
Slide 17 of 19

18. Current choices also affect the
Production Possibility Curve
To start, note that we have new
goods on these axis.
On the Y-Axis we have Capital
Goods –those that are used to
make other things.
On the X-Axis we have Consumer
Goods –those that are used right
away.
Imagine we have two countries
that are the same in every aspect
expect they choose different
points on their Production
Possibility Curves.
Country A chooses to make a lot
of consumer goods.
Country B chooses to make a lot
of capital goods.
Which will grow more quickly?Hopefully, you chose B. With
more capital goods, it’s ability to
produce more in the future will
increase and their PPC will shift
out to reflect that!
This is an application of a Key Learning
Outcome: Resources are scarce therefore
individuals and society must make choices
based on opportunity costs…it is the
economizing problem!
Slide 18 of 19

19. In summary
Individuals and countries face scarcity and must make
decisions on how to allocate their scarce resources.
These decisions require sacrifices of other
things, referred to as opportunity costs.
Over time, our incomes, populations, and
technologies might expand, which will
lessen the burden of scarcity.
Economics is the study of these decisions!
Slide 19 of 19