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Chapter 2 - Scarcity and the World of

Trade-Offs 1
Learning Objectives
Evaluate whether even affluent people face the
problem of scarcity
Understand why economists consider wants but
not needs
Explain why the scarcity problem induces
individuals to consider opportunity costs
Chapter 2 - Scarcity and the World of
Trade-Offs 2
Learning Objectives
Discuss why obtaining increasing increments of
any particular good entails giving up more and
more units of other goods
Explain why society faces a trade-off between
consumption goods and capital goods
Distinguish between absolute and comparative
advantage
Chapter 2 - Scarcity and the World of
Trade-Offs 3
Scarcity
Scarcity
Is the most basic concept in all of economics
Occurs when the ingredients for producing
things that people desire are insufficient to
satisfy all wants
Means we never have enough of everything,
including time, to satisfy our every desire
Chapter 2 - Scarcity and the World of
Trade-Offs 4
Scarcity
What scarcity is NOT
It is not a shortage.
It is not the same thing as poverty.
Chapter 2 - Scarcity and the World of
Trade-Offs 5
Scarcity
Production
Any 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
Chapter 2 - Scarcity and the World of
Trade-Offs 6
Scarcity
Resources or Factors of Production
Land
Natural resources or the gifts of nature
Labor
The human resource
Chapter 2 - Scarcity and the World of
Trade-Offs 7
Scarcity
Resources or Factors of Production
Physical Capital
All manufactured resources
Human Capital
Accumulated training and education of workers
Chapter 2 - Scarcity and the World of
Trade-Offs 8
Scarcity
Resources or Factors of Production
Entrepreneurship
Person who organizes, manages, and assembles the
other resources
Risk taker
Maker of basic business policy decisions
Chapter 2 - Scarcity and the World of
Trade-Offs 9
Scarcity
Economic Goods
Scarce goods, for which the quantity demanded
exceeds the quantity supplied at zero price.
Chapter 2 - Scarcity and the World of
Trade-Offs 10
Scarcity
Services
Tasks that are performed for someone else
Can be referred to as intangible goods
Chapter 2 - Scarcity and the World of
Trade-Offs 11
Scarcity
Scarcity occurs when the ingredients
(resources) for producing things that people
desire are insufficient to satisfy all wants.
Chapter 2 - Scarcity and the World of
Trade-Offs 12
Wants and Needs
Needs
To economists, the term need is not definable.
Wants
Goods and services on which we place a
positive value
People have unlimited wants.
Chapter 2 - Scarcity and the World of
Trade-Offs 13
Scarcity, Choice,
and Opportunity Cost
Opportunity Cost
The highest-valued, next-best alternative that
must be sacrificed to obtain something or to
satisfy a want
Chapter 2 - Scarcity and the World of
Trade-Offs 14
Scarcity, Choice,
and Opportunity Cost
Questions
What is the opportunity cost of attending this
economics class?
What is the opportunity cost of attending a
concert by your favorite band?
What is the opportunity cost of increasing
research for an AIDS vaccine?
Chapter 2 - Scarcity and the World of
Trade-Offs 15
Limited Resources & Unlimited Wants
Scarcity
Choices
Opportunity Cost
Scarcity, Choice,
and Opportunity Cost
Chapter 2 - Scarcity and the World of
Trade-Offs 16
E-Commerce Example: Making It Easier
to Get to the Submit Order Button
About half of all consumers who placed items in online
shopping carts abandon them before authorizing
payment.
To reduce the opportunity cost of purchasing online,
Internet sellers are simplifying the checkout process.
For an Internet retailer, what is the opportunity cost of
failing to simplify its software in a way that encourages
consumers to finalize orders?
Chapter 2 - Scarcity and the World of
Trade-Offs 17
The World of Trade-Offs
Whenever you engage in any activity, using
any resource, you are trading off the use of
that resource for one or more alternative
uses.
The value of the trade-off is represented by
the opportunity cost, (that which you give
up to obtain something else).
Chapter 2 - Scarcity and the World of
Trade-Offs 18
The World of Trade-Offs
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.
Chapter 2 - Scarcity and the World of
Trade-Offs 19
Production Possibilities Curve for Grades in
Mathematics and Economics (Trade-Offs)
Chapter 2 - Scarcity and the World of
Trade-Offs 20
Production
Possibilities Curve (PPC)
Questions
What would happen to the production
possibilities curve if you spent more
time studying?
What would happen to your potential grades?
Is it possible that terms of the trade-off might
not be constant?
Chapter 2 - Scarcity and the World of
Trade-Offs 21
The Choices Society Faces
PPC is used to demonstrate
related concepts of scarcity, choice, and
trade-offs
At the individual level
At the societal level
Chapter 2 - Scarcity and the World of
Trade-Offs 22
Societys Trade-Off Between
Digital Cameras and Pocket PCs
Chapter 2 - Scarcity and the World of
Trade-Offs 23
Societys Trade-Off Between
Digital Cameras and Pocket PCs
Chapter 2 - Scarcity and the World of
Trade-Offs 24
The Choices Society Faces
Production possibilities assumptions
Resources are fully employed
Production takes place over a specific
time period
Resources are fixed for the time period
Technology does not change over the
time period
Chapter 2 - Scarcity and the World of
Trade-Offs 25
The Choices Society Faces
Technology
Societys pool of applied knowledge
concerning how goods and services
can be produced
Chapter 2 - Scarcity and the World of
Trade-Offs 26
The Choices Society Faces
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
Chapter 2 - Scarcity and the World of
Trade-Offs 27
The Choices Society Faces
Inefficient Point
Any point below the production possibilities curve at
which the use of resources is not generating the
maximum possible output
Law of Increasing Relative Cost
As 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
Chapter 2 - Scarcity and the World of
Trade-Offs 28
The Law of Increasing Relative Cost
Chapter 2 - Scarcity and the World of
Trade-Offs 29
The Choices Society Faces
In general, the more specialized the
resources, the more bowed the PPC
Chapter 2 - Scarcity and the World of
Trade-Offs 30
Economic Growth and the
Production Possibilities Curve
Economic growth
Increases the production possibilities
of digital cameras and pocket PCs
Occurs over a period of time
Is illustrated by an outward shift
of the production possibilities curve
Chapter 2 - Scarcity and the World of
Trade-Offs 31
Economic Growth Allows for
More of Everything
Chapter 2 - Scarcity and the World of
Trade-Offs 32
The Trade-Off Between
the Present and the Future
PPC
Can be used to illustrate the trade-off between
present and future consumption
Consumption
The use of goods and services for personal
satisfaction
Chapter 2 - Scarcity and the World of
Trade-Offs 33
Capital Goods and Growth
Consumer goods
Goods produced for
personal satisfaction
Capital goods
Goods used to produce
other goods
Chapter 2 - Scarcity and the World of
Trade-Offs 34
Capital Goods and Growth
Observations
Increase in capital goods stimulates economic
growth
An increase in capital goods at present will lead
to a higher rate of economic growth in the
future.
In the future, the economic system
can produce more consumer goods.

Chapter 2 - Scarcity and the World of
Trade-Offs 35
Specialization and
Greater Productivity
Specialization
Organization of economic activity among
different individuals and regions
Leads to greater productivity
Chapter 2 - Scarcity and the World of
Trade-Offs 36
Specialization and
Greater Productivity
Comparative Advantage
The ability to produce a good or service at a
lower opportunity cost
Is always a relative concept
Chapter 2 - Scarcity and the World of
Trade-Offs 37
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
Chapter 2 - Scarcity and the World of
Trade-Offs 38
Division of Labor
Rational individuals choose their
comparative advantage and specialize.
Specialization leads to division of labor.
Chapter 2 - Scarcity and the World of
Trade-Offs 39
Division of Labor
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
Chapter 2 - Scarcity and the World of
Trade-Offs 40
Comparative Advantage
and Trade Among Nations
Recall
Analysis of absolute advantage, comparative
advantage, and specializationapplicable to
individuals and nations
Chapter 2 - Scarcity and the World of
Trade-Offs 41
Comparative Advantage
and Trade Among Nations
When nations specialize where they have a
comparative advantage and then trade with
the rest of the world
Economic efficiency improves
Output increases
Average standard of living rises
Chapter 2 - Scarcity and the World of
Trade-Offs 42
International Example: Multiple
Comparative Advantages in Dishwasher
Production
Maytag dishwashers assembled in Jackson,
Tennessee contain components manufactured
throughout the world.
Some may consider it a plus to buy an appliance
labeled Made in the USA, but the overall cost of
the dishwasher is lower than it would be if all the
individual parts were manufactured within U.S.
borders.
Chapter 2 - Scarcity and the World of
Trade-Offs 43
Summary Discussion
of Learning Objectives
The problem of scarcity, even for the affluent
Scarcity and poverty are not synonymous.
Why economists consider individuals wants but
not their needs
Needs are not objectively definable.
Wants are things on which we place a positive value.
Chapter 2 - Scarcity and the World of
Trade-Offs 44
Summary Discussion
of Learning Objectives
Why the scarcity problem leads people to evaluate
opportunity costs
Allocating resources to producing one good means
losing the opportunity to have another one.
Why getting more units of one good requires
giving up more and more of another
Resources are specialized
Chapter 2 - Scarcity and the World of
Trade-Offs 45
Summary Discussion
of Learning Objectives
There is a trade-off between consumption
goods and capital goods.
As more resources are devoted to the
production of capital goods, we can expect the
rate of economic growth to increase.
Chapter 2 - Scarcity and the World of
Trade-Offs 46
Summary Discussion
of Learning Objectives
Absolute versus comparative advantage
One finds ones absolute advantage by producing more
of a specific good than someone else who uses the same
amount of resources.
One finds ones comparative advantage by looking at
the activity that has the lowest opportunity cost.

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