SCARCITY

absolute advantage capital command economy comparative advantage consumer goods consumer sovereignty economic growth economic problem Investment Productive resources: natural resources capital resource human resource (including human capital) Terms to Know and Apply Economic decisions: Scarcitychoice costs and benefits opportunity cost marginal (added) cost trade-offs laissez-faire economy opportunity cost MarketOutputsPriceProduction resources or inputs three basic questions

Terms to Know and Apply Goods and services: producersconsumersbuyerssellersproductiondistributionconsumption channels of distribution marketing

The basic economic problem that arises because people have unlimited wants but resources are limited. Because of scarcity, various economic decisions must be made to allocate resources efficiently. Scarcity When we talk of scarcity within an economic context, it refers to limited resources, not a lack of riches. These resources are the inputs of production: land, labor and capital.

People must make choices between different items because the resources necessary to fulfill their wants are limited. These decisions are made by giving up (trading off) one want to satisfy another.

There is only so much wheat grown every year. Some people want bread; some people want cereal; some people want beer, and so on. Only so much of any one product can be made because of the scarcity of wheat. How do we decide how much flour should be made for bread? Because of scarcity people have to make choices, choices have costs and benefits People are likely to make the choice that has the most benefit to them, with the least cost, or, put another way, the choice that provides more in benefits than it costs.

Scarcity requires choice. People must choose which of their desires they will satisfy and which they will leave unsatisfied. When we, either as individuals or as a society, choose more of something, scarcity forces us to take less of something else. Economics is sometimes called the study of scarcity because economic activity would not exist if scarcity did not force people to make choices If not for choice our economic system would not work. What if we only had one car maker to choose from? What if we only had one company that made bread?, cereal?, soft drinks?

Human wants are unlimited, but resources are not. Scarcity, Choice, and Opportunity Cost Three basic questions must be answered in order to understand an economic system: What gets produced? How is it produced? Who gets what is produced?

Every society has some system or mechanism that transforms that society’s scarce resources into useful goods and services. Scarcity, Choice, and Opportunity Cost

The basic resources that are available to a society are factors of production: Land Labor Capital

Capital refers to the things that are themselves produced and then used to produce other goods and services

Production is the process that transforms scarce resources into useful goods and services. Resources or factors of production are the inputs into the process of production; goods and services of value to households are the outputs of the process of production. Nearly all the basic decisions that characterize complex economies must also be made in a single-person economy. Constrained choice and scarcity are the basic concepts that apply to every society

A producer has an absolute advantage over another in the production of a good or service if it can produce that product using fewer resources. Scarcity and Choice in an Economy of Two or More Daily Production Wood (logs) Food (bushels) Colleen10 Bill48 Colleen has an absolute advantage in the production of both wood and food because she can produce more of both goods using fewer resources than Bill.

Daily Production Wood (logs) Food (bushels) Colleen10 Bill48 In terms of wood:  For Bill, the opportunity cost of 8 bushels of food is 4 logs.  For Colleen, the opportunity cost of 8 bushels of food is 8 logs. In terms of food:  For Colleen, the opportunity cost of 10 logs is 10 bushels of food.  For Bill, the opportunity cost of 10 logs is 20 bushels of food.

Suppose that Colleen and Bill each wanted equal numbers of logs and bushels of food. In a 30-day month they could produce Daily Production Wood (logs) Food (bushels) Colleen10 Bill48 Monthly Production with No Trade Wood (logs) Food (bushels) Colleen150 Bill80 Total230 Monthly Production after Specialization Wood (logs) Food (bushels) Colleen27030 Bill0240 Total270 By specializing on the basis of comparative advantage, Colleen and Bill can produce more of both goods.

To end up with equal amounts of wood and food after trade, Colleen could trade 100 logs for 140 bushels of food. Then: Monthly Production after Specialization Wood (logs) Food (bushels) Colleen27030 Bill0240 Total270 Monthly Use After Trade Wood (logs) Food (bushels) Colleen170 Bill100 Total270

The economic problem: Given scarce resources, how, do large, complex societies go about answering the three basic economic questions?

Economic systems are the basic arrangements made by societies to solve the economic problem. They include:  Command economies  Laissez-faire economies  Mixed systems

In a command economy, a central government either directly or indirectly sets output targets, incomes, and prices. Economy planned and directed by government, where resources are allocated to factories by the state through central planning. This system is unresponsive to the needs and whims of consumers and to sudden changes in conditions (for example, crop failure or fluctuations in the world price of raw materials). For example, in the former USSR, state planners decided what was to be produced. They passed orders down to factories, allocating raw materials, workers, and other factors of production to them. Factories were then told how much they should produce with these resources and where they should be sent. If there was a shortage of goods in the shops, then goods would be rationed through queuing.

In a laissez-faire economy, individuals and firms pursue their own self-interests without any central direction or regulation. The central institution of a laissez-faire economy is the free- market system. A market is the institution through which buyers and sellers interact and engage in exchange.

In a laissez-faire economy, the distribution of output is also determined in a decentralized way. The amount that any one household gets depends on its income and wealth.

Consumer sovereignty is the idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase). The theory of consumer sovereignty says that, while businesses and companies can produce anything they choose, if consumers do not want or need a product, it will not sell. If a product is not sold, it will not continue to be produced. Therefore, buyers ultimately decide what is produced.

Under a free market system, individual producers must figure out how to plan, organize, and coordinate the production of products and services. Free Enterprise is an economic system where few restrictions are placed on business activities and ownership. In this system, governments generally have minimal ownership of enterprises in the market place. This system aims for limited restrictions on trade and minimal government intervention. Free Enterprise

The basic coordinating mechanism in a free market system is price. Price is the amount that a product sells for per unit. It reflects what society is willing to pay. In economics, price is determined by what (1) a buyer is willing to pay, (2) a seller is willing to accept, and (3) the competition is allowing to be charged. With product, promotion, and place of marketing mix, it is one of the business variables over which organizations can exercise some degree of control

Capitalism and Free Enterprise are interchangeable. Capitalism: an economic system in which resources and means of production are privately owned and prices, production, and the distribution of goods are determined mainly by competition in a free market. The United States in a capitalist economy.

Since markets are not perfect, governments intervene and often play a major role in the economy. Some of the goals of government are to: Minimize market inefficiencies Provide public goods Redistribute income Stabilize the macroeconomy:  Promote low levels of unemployment  Promote low levels of inflation