Your SlideShare is downloading. ×
  • Like
Choice scarsity
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Now you can save presentations on your phone or tablet

Available for both IPhone and Android

Text the download link to your phone

Standard text messaging rates apply

Choice scarsity

  • 110 views
Published

 

Published in Economy & Finance , Technology
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
110
On SlideShare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
11
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. The Fundamental Economic Problem: Scarcity and ChoiceOur necessities are few but are wants are endless. INSCRIPTION ON A FORTUNE COOKIE
  • 2. ContentsContents● Scarcity, Choice, and Opportunity Cost● Scarcity, Choice, and Opportunity Cost● Scarcity and Choice for a Single Firm● Scarcity and Choice for a Single Firm● Scarcity and Choice for the Entire Society● Scarcity and Choice for the Entire Society● The Concept of Efficiency● The Concept of Efficiency● The Three Coordination Tasks of any● The Three Coordination Tasks of any Economy Economy Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 3. Contents (continued)Contents (continued)● Specialization Fosters Efficient Resource● Specialization Fosters Efficient Resource Allocation Allocation● Specialization Leads to Exchange● Specialization Leads to Exchange● Markets, Prices, and the Three Coordination● Markets, Prices, and the Three Coordination Tasks Tasks● A Last Word: Don’t Confuse Ends with● A Last Word: Don’t Confuse Ends with Means Means Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 4. Scarcity, Choice and Scarcity, Choice and Opportunity Cost Opportunity Cost● Scarcity of resources ⇒ necessity of● Scarcity of resources ⇒ necessity of choices choices● Opportunity cost = value of the best● Opportunity cost = value of the best forgone alternative forgone alternative ♦ True cost of a scarce resource ♦ True cost of a scarce resource Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 5. Opportunity Cost and MoneyOpportunity Cost and MoneyCostCost● Opportunity cost: Closely related to money● Opportunity cost: Closely related to money cost if markets are well functioning cost if markets are well functioning● No explicit prices for some valuable● No explicit prices for some valuable resources, e.g., time resources, e.g., time● Total cost = money cost + opportunity● Total cost = money cost + opportunity cost cost Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 6. Opportunity Cost and MoneyOpportunity Cost and MoneyCostCost● Example of opportunity cost: a firm that● Example of opportunity cost: a firm that produces two outputs with a fixed supply of produces two outputs with a fixed supply of inputs inputs● More of one output ⇒ less of the other● More of one output ⇒ less of the other output output Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 7. Scarcity and Choice for a Scarcity and Choice for a Single Firm Single Firm● Production Possibilities Frontier● Production Possibilities Frontier ♦ Production possibilities frontier = a graph ♦ Production possibilities frontier = a graph showing different combinations of output for a showing different combinations of output for a given amount of inputs given amount of inputs ♦ More of one good ⇒ less of another ♦ More of one good ⇒ less of another ♦ Illustrates opportunity costs in production ♦ Illustrates opportunity costs in production Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 8. TABLE 1 Production Possibilities TABLE 1 Production PossibilitiesOpen to a FarmerOpen to a Farmer Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 9. The Production PossibilitiesThe Production PossibilitiesFrontierFrontier● Negatively sloped● Negatively sloped● Slope = opportunity cost● Slope = opportunity cost● Illustrates the trade-off in the production of● Illustrates the trade-off in the production of one good (or class of goods) against another one good (or class of goods) against another Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 10. FIGURE 1 PPF for Production by FIGURE 1 PPF for Production bya Single Farmera Single Farmer A Unattainable Soybeans 40 region B 30 Attainable region C 20 D 10 0 E 10 20 30 38 52 60 65 Wheat Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 11. The Principle of Increasing CostsThe Principle of Increasing Costs ♦ Shape: concave ♦ Shape: concave ♦ Principle of increasing costs: ♦ Principle of increasing costs: ↑ production of one good ⇒ ↑ production of one good ⇒ ↑ opportunity cost of producing another ↑ opportunity cost of producing another unit unit ♦ Reason: Inputs tend to be specialized. ♦ Reason: Inputs tend to be specialized. Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 12. FIGURE 2 FIGURE 2 PPF with No PPF with NoSpecialized ResourcesSpecialized Resources 50 A 40 Black Shoes B 30 C 20 D 10 0 10 20 30 40 50 Brown Shoes Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 13. The Principle of Increasing CostsThe Principle of Increasing Costs● Productivity constant along a production● Productivity constant along a production possibilities frontier. possibilities frontier.∉ ∆ productivity ⇒ shift of the frontier∉ ∆ productivity ⇒ shift of the frontier ♦ Skills ♦ Skills ♦ Technology ♦ Technology ♦ Capital stock ♦ Capital stock Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 14. Scarcity and Choice for the Scarcity and Choice for the Entire Society Entire Society● Resources are scarce for the entire society.● Resources are scarce for the entire society.● Choices must be made: More of one good● Choices must be made: More of one good implies less of another. implies less of another.● Production possibilities frontier applicable● Production possibilities frontier applicable to the economy as a whole. to the economy as a whole. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 15. FIGURE 3 PPF for Entire FIGURE 3 PPF for EntireEconomyEconomy 700 B Thousands of Automobiles per Year 600 D 500 E 400 300 G F 200 100 0 C 100 200 300 400 500 Missiles per Year Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 16. Scarcity and Choice for the Scarcity and Choice for the Entire Society Entire Society● Economic growth = increase in production● Economic growth = increase in production of goods and services of goods and services● Trade-off between consumption goods and● Trade-off between consumption goods and capital goods capital goods● Investment in capital goods shifts out the● Investment in capital goods shifts out the production possibilities frontier. production possibilities frontier. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 17. Growth in the United States andGrowth in the United States andAsiaAsia G F g Next year’s N production Next year’s A production possibilities possibilities Consumption Goods Consumption Goods f This year’s production possibilities This year’s production possibilities B F G f g Capital Goods Capital Goods (a) United States (b) Asia Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 18. Scarcity and Choice Elsewhere Scarcity and Choice Elsewherein the Economy in the Economy● Problems of scarcity and choice are● Problems of scarcity and choice are everywhere in the economy. everywhere in the economy.● Households, firms, and government must● Households, firms, and government must decide how to allocate their income. decide how to allocate their income. Copyright© 2006 South-Western/Thomson Learning. All rights reserved.
  • 19. The Concept of Efficiency The Concept of Efficiency● Efficiency = no waste● Efficiency = no waste● All available resources are utilized.● All available resources are utilized.● Sources of inefficiency● Sources of inefficiency ♦ Assigning inputs to the wrong task ♦ Assigning inputs to the wrong task ♦ Unemployment ♦ Unemployment ♦ Discrimination ♦ Discrimination● Competition should eliminate inefficiency.● Competition should eliminate inefficiency. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 20. The Concept of Efficiency The Concept of Efficiency● Efficiency and the production possibilities● Efficiency and the production possibilities frontier frontier ♦ Every point on a production possibilities ♦ Every point on a production possibilities frontier is efficient. frontier is efficient. ♦ Efficiency does not tell us which point is best. ♦ Efficiency does not tell us which point is best. ♦ Any point inside the frontier is inefficient. ♦ Any point inside the frontier is inefficient. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 21. The Three Coordination The Three Coordination Tasks of Any Economy Tasks of Any Economy● How to utilize its resources efficiently.● How to utilize its resources efficiently.● What combination of goods and services to● What combination of goods and services to produce. produce.● How much of each good to distribute to● How much of each good to distribute to each person. each person. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 22. Specialization Fosters Specialization Fosters Efficient Resource Allocation Efficient Resource Allocation● The Wonders of the Division of Labor● The Wonders of the Division of Labor ♦ Breaking a task into a set of smaller, more ♦ Breaking a task into a set of smaller, more specialized tasks specialized tasks ♦ Specialization ⇒ productivity growth ♦ Specialization ⇒ productivity growth Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 23. Specialization Fosters Specialization Fosters Efficient Resource Allocation Efficient Resource Allocation● The Amazing Principle of Comparative● The Amazing Principle of Comparative Advantage Advantage ♦ Principle of comparative advantage = ♦ Principle of comparative advantage = specialization in the production of the good specialization in the production of the good with the lowest opportunity cost with the lowest opportunity cost ♦ Comparative advantage ⇒ specialization ♦ Comparative advantage ⇒ specialization Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 24. Specialization Leads to Specialization Leads to Exchange Exchange● Specialization requires exchange● Specialization requires exchange● Trading ⇒ ↑ production because it permits● Trading ⇒ ↑ production because it permits specialization specialization Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 25. Markets, Prices, and the Markets, Prices, and the Three Coordination Tasks Three Coordination Tasks● Markets ⇒ solutions to the three● Markets ⇒ solutions to the three coordination tasks coordination tasks● Consumers are in control● Consumers are in control● Sometimes the solutions are compatible● Sometimes the solutions are compatible with society’s goals, other times not. with society’s goals, other times not. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
  • 26. Last Word: Don’t Confuse Last Word: Don’t Confuse Ends with Means Ends with Means● Economic analysis ≠ judgment of● Economic analysis ≠ judgment of capitalism capitalism● Values ⇒ ends● Values ⇒ ends● Pragmatism ⇒ means● Pragmatism ⇒ means● Economic analysis concerns means, not● Economic analysis concerns means, not ends. ends. Copyright © 2006 South-Western/Thomson Learning. All rights reserved.