Chapter 2 Scarcity & Competition * 30 January 2018 Chapter 2 Scarcity & Competition Part I Scarcity Part II Production Possibility Frontier Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition Part I Scarcity Chapter 2 Scarcity & Competition

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives Scarcity Scarce Good vs. Free Good Questions About Scarcity Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives Scarcity Scarce Good vs. Free Good Questions About Scarcity Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition * 30 January 2018 Scarcity Scarcity refers to a situation where the availability of resources in the economy is limited relative to people’s wants. It is referred as the first economic problem. Why? The question will be answered later. Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition * 30 January 2018 Scarcity Because of ‘scarcity’, we have to distinguish 2 kinds of goods: Scarce good Free good Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives Scarcity Scarce Good vs. Free Good Questions About Scarcity Chapter 2 Scarcity & Competition *

Scarce Good vs. Free Good * 30 January 2018 Scarce Good vs. Free Good Scarce good is defined as an entity (or commodity) of which people want more than they already have. It is also known as economic good. Free good is defined as an entity (or commodity) of which no one wants more than they already have. Chapter 2 Scarcity & Competition *

fresh air in this classroom fresh air on the playground my lecture * 30 January 2018 Question Identify whether the following commodities are free goods or scarce goods. your pocket money fresh air in this classroom fresh air on the playground my lecture rubbish a,b,d – scarce good; c – free good, e – bad. *

Scarce Good vs. Free Good * 30 January 2018 Scarce Good vs. Free Good The good is something of which some is better than none, or more is better than less. The bad is something of which less is better than more. Chapter 2 Scarcity & Competition *

Scarce Good vs. Free Good * 30 January 2018 Scarce Good vs. Free Good Scarce good is defined as an entity (or commodity) that the quantity demanded is greater than quantity supplied when the price is zero. Free good is defined as an entity (or commodity) that the quantity supplied is greater than quantity demanded when the price is zero. Chapter 2 Scarcity & Competition *

* 30 January 2018 P P S S D D Q Q Economic Goods Free Goods *

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives Scarcity Scarce Good vs. Free Good Questions About Scarcity Chapter 2 Scarcity & Competition *

Questions About Scarcity * 30 January 2018 Questions About Scarcity It is the fact that most of the goods or services that we want are scarce goods because either the amount endowed by nature cannot satisfy all our wants, or the goods and services that we want have to be produced from scarce resources. Therefore ‘scarcity’ is an universal phenomenon. Chapter 2 Scarcity & Competition *

Is scarcity ‘shortage’? Is scarcity caused by poverty? * 30 January 2018 Question Is scarcity ‘shortage’? Is scarcity caused by poverty? Can scarcity be solved by raising production? raising the market price? competition? ‘Shortage’ implies ‘scarcity’, but ‘scarcity’ does not implies ‘shortage’. *

If there was no ‘scarcity’, then could we have economics? * 30 January 2018 Question If there was no ‘scarcity’, then could we have economics? If there was no ‘scarcity’, we would not have economics, so it is the first economic problem. *

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives What Does Scarcity Lead to? Concept of Cost Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives What Does Scarcity Lead to? Concept of Cost Chapter 2 Scarcity & Competition *

Competition Discrimination Scarcity

What Does Scarcity Lead to? * 30 January 2018 What Does Scarcity Lead to? Competition refers to the action of people in the society to claim the use of the scarce resources, which results in the discrimination of winners and losers. Discrimination distinguishes between who gets the resources and who does not. Chapter 2 Scarcity & Competition *

What Does Scarcity Lead to? * 30 January 2018 What Does Scarcity Lead to? There are 2 types of competition: Price competition Non-price competition Chapter 2 Scarcity & Competition *

What Does Scarcity Lead to? * 30 January 2018 What Does Scarcity Lead to? Price competition refers to a competition where the ability to pay the highest price is used as a criterion. Non-price competition refers to a competition in terms of factors other than price. Chapter 2 Scarcity & Competition *

How can you go to the University? Who can win the beauty contest? * 30 January 2018 Question How can you go to the University? Who can win the beauty contest? Who is the winner of a football match? Who win the Mark Six? These are competition using ‘non-price’ criteria to determine who wins and who loses. *

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives What Does Scarcity Lead to? Concept of Cost Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition * 30 January 2018 Concept of Cost ‘Cost’ is defined as the highest valued alternative that must be sacrificed to obtain something or to satisfy a want. It is also known as ‘opportunity cost’. Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition * 30 January 2018 Concept of Cost The full cost of action refers to the total opportunity cost of that action. Chapter 2 Scarcity & Competition *

Monetary expenses Non-monetary expenses

What is the ‘cost’ of playing table tennis? * 30 January 2018 Example What is the ‘cost’ of playing table tennis? What is the ‘cost’ of seeing a film that you have a ticket for free? *

* 30 January 2018 Question Suppose there are two farmers A & B having the same productivity. A is a landlord who owns his/her own land and B has to rent the land from other landlords. The following table shows the revenue, expense and net gain of each of them. *

Question Farmer A Farmer B Revenue $100 Expense $0 $60 Net gain $40 * 30 January 2018 Question Situation 1 Farmer A Farmer B $ per year Revenue $100 Expense $0 $60 Net gain $40 The rental expense of farmer B is $60. *

Question Farmer A Farmer B Revenue $40 Expense $0 $60 Net gain -$20 * 30 January 2018 Question Situation 2 Farmer A Farmer B $ per year Revenue $40 Expense $0 $60 Net gain -$20 Expecting poor harvest in the future, the revenue each year will fall to $40. How would farmers A & B react to this change? *

Production Possibility Frontier Part II Production Possibility Frontier Chapter 2 Scarcity & Competition

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives Production Possibility Frontier The Model Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives Production Possibility Frontier The Model Chapter 2 Scarcity & Competition *

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier Production Possibility Frontier (PPF) or production possibility boundary is a simple economic model of an economy to describe the following concepts: Scarcity Production Efficiency Choice and Opportunity Cost Growth Chapter 2 Scarcity & Competition *

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier The PPF shows the maximum amount of goods and services that can be produced by an economy with the existing resources and technology. Chapter 2 Scarcity & Competition *

Chapter 2 Scarcity & Competition * 30 January 2018 Learning Objectives Production Possibility Frontier The Model Chapter 2 Scarcity & Competition *

* 30 January 2018 The Model Imagine there is an island with only 10 dwellers. Assuming that this small economy has only one limited resource, that is, labour. Since each dweller can work for 12 hours a day, the total amount of natural resources in this island is 120 man-hours. *

* 30 January 2018 The Model If all the workers farm, a total of 1,000kg of wheat can be produced each year. On the other hand, if all the workers fish, 1,200 kg of fish can be caught each day. *

Wheat (kg per day) Fish 1,000 875 600 825 700 550 375 1,100 1,200 * 30 January 2018 Wheat (kg per day) Fish 1,000 875 600 825 700 550 375 1,100 1,200 *

Wheat (kg per day) Fishes (kg per day) PPF 1,000 875 825 550 375 600 600 700 1,000 1,100 1,200 Fishes (kg per day)

Unattainable region PPF Wheat Fishes

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier Production Possibility Frontier (PPF) or production possibility boundary is a simple economic model of an economy to describe the following concepts: Scarcity Production Efficiency Choice and Opportunity Cost Growth Chapter 2 Scarcity & Competition *

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier Given that there are limited resources, scarcity will occur whenever the people on the island desire those combinations of goods that are beyond the PPF. Chapter 2 Scarcity & Competition *

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier Production Possibility Frontier (PPF) or production possibility boundary is a simple economic model of an economy to describe the following concepts: Scarcity Production Efficiency Choice and Opportunity Cost Growth Chapter 2 Scarcity & Competition *

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier Efficient use of resources implies that it is impossible for the economy to have more of one good without reducing the production of another good. Any production point along the PPF is efficient. Chapter 2 Scarcity & Competition *

Unattainable region PPF Wheat Inefficient region Fishes

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier Production Possibility Frontier (PPF) or production possibility boundary is a simple economic model of an economy to describe the following concepts: Scarcity Production Efficiency Choice and Opportunity Cost Growth Chapter 2 Scarcity & Competition *

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier Because of the existence of trade-offs between farming and fishing, the opportunity cost of farming is equal to the loss of fish and the opportunity cost of fishing is equal to the loss of wheat. The magnitude of the slope of the PPF represents the cost of catching one additional kg of fish. It is also known as the marginal cost of fishing. Chapter 2 Scarcity & Competition *

What are the opportunity costs of fishing in the following ranges: * 30 January 2018 Question What are the opportunity costs of fishing in the following ranges: 600 to 700 kg of fishing 1,000 to 1,100 kg of fishing? *

W Wheat (kg per day) F Fishes (kg per day) 1,000 875 825 550 375 600 600 700 1,000 1,100 1,200 F Fishes (kg per day)

What are the opportunity costs of fishing in the following ranges: * 30 January 2018 Question What are the opportunity costs of fishing in the following ranges: 600 to 700 kg of fishing 1,000 to 1,100 kg of fishing? *

Wheat (kg per day) W F Fishes (kg per day) 1,000 875 825 550 375 600 600 700 1,000 1,100 1,200 F Fishes (kg per day)

What are the opportunity costs of farming in the following ranges: * 30 January 2018 Question What are the opportunity costs of farming in the following ranges: 600 to 700 kg of fishing? *

W Wheat (kg per day) F Fishes (kg per day) 1,000 875 825 550 375 600 600 700 1,000 1,100 1,200 F Fishes (kg per day)

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier Production Possibility Frontier (PPF) or production possibility boundary is a simple economic model of an economy to describe the following concepts: Scarcity Production Efficiency Choice and Opportunity Cost Growth Chapter 2 Scarcity & Competition *

Production Possibility Frontier * 30 January 2018 Production Possibility Frontier Growth of an economy can be induced by the following factors: Increasing the amount of resources Improvement of technology Accumulation of capital goods It is represented by an outward shift of the PPF curve. Chapter 2 Scarcity & Competition *

Unattainable region PPF Wheat Fishes

* 30 January 2018 Example Draw the PPF of two goods (wheat and fish) which have constant marginal cost of production. *

PPF Wheat Fishes