The Fundamental     Economic Problem:     Scarcity and ChoiceOur necessities are few but are wants are endless.         IN...
ContentsContents● Scarcity, Choice, and Opportunity Cost● Scarcity, Choice, and Opportunity Cost● Scarcity and Choice for ...
Contents (continued)Contents (continued)● Specialization Fosters Efficient Resource● Specialization Fosters Efficient Reso...
Scarcity, Choice and      Scarcity, Choice and      Opportunity Cost      Opportunity Cost● Scarcity of resources ⇒ necess...
Opportunity Cost and MoneyOpportunity Cost and MoneyCostCost● Opportunity cost: Closely related to money● Opportunity cost...
Opportunity Cost and MoneyOpportunity Cost and MoneyCostCost● Example of opportunity cost: a firm that● Example of opportu...
Scarcity and Choice for a      Scarcity and Choice for a      Single Firm      Single Firm● Production Possibilities Front...
TABLE 1 Production Possibilities TABLE 1 Production PossibilitiesOpen to a FarmerOpen to a Farmer                   Copyri...
The Production PossibilitiesThe Production PossibilitiesFrontierFrontier● Negatively sloped● Negatively sloped● Slope = op...
FIGURE 1 PPF for Production by FIGURE 1 PPF for Production bya Single Farmera Single Farmer                    A          ...
The Principle of Increasing CostsThe Principle of Increasing Costs ♦ Shape: concave ♦ Shape: concave ♦ Principle of increa...
FIGURE 2 FIGURE 2 PPF with No           PPF with NoSpecialized ResourcesSpecialized Resources                     50      ...
The Principle of Increasing CostsThe Principle of Increasing Costs● Productivity constant along a production● Productivity...
Scarcity and Choice for the      Scarcity and Choice for the      Entire Society      Entire Society● Resources are scarce...
FIGURE 3 PPF for Entire FIGURE 3 PPF for EntireEconomyEconomy                                            700              ...
Scarcity and Choice for the     Scarcity and Choice for the     Entire Society     Entire Society● Economic growth = incre...
Growth in the United States andGrowth in the United States andAsiaAsia                     G                     F        ...
Scarcity and Choice Elsewhere Scarcity and Choice Elsewherein the Economy in the Economy● Problems of scarcity and choice ...
The Concept of Efficiency      The Concept of Efficiency● Efficiency = no waste● Efficiency = no waste● All available reso...
The Concept of Efficiency      The Concept of Efficiency● Efficiency and the production possibilities● Efficiency and the ...
The Three Coordination     The Three Coordination     Tasks of Any Economy     Tasks of Any Economy● How to utilize its re...
Specialization Fosters      Specialization Fosters      Efficient Resource Allocation      Efficient Resource Allocation● ...
Specialization Fosters      Specialization Fosters      Efficient Resource Allocation      Efficient Resource Allocation● ...
Specialization Leads to     Specialization Leads to     Exchange     Exchange● Specialization requires exchange● Specializ...
Markets, Prices, and the     Markets, Prices, and the     Three Coordination Tasks     Three Coordination Tasks● Markets ⇒...
Last Word: Don’t Confuse     Last Word: Don’t Confuse     Ends with Means     Ends with Means● Economic analysis ≠ judgmen...
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Choice scarsity

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Choice scarsity

  1. 1. The Fundamental Economic Problem: Scarcity and ChoiceOur necessities are few but are wants are endless. INSCRIPTION ON A FORTUNE COOKIE
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.
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