SCARCITY: The fundamental economic problem Wants are unlimited Resources are limited i) Land ii) Labour iii) Capital iv) Entrepreneurship

PRODUCTION POSSIBILITIES T SHIRTS SHOES 20 18 1 15 2 11 3 6 4 5

PRODUCTION POSSIBILITY FRONTIER Illustrates Scarcity: Some wants are not met More of one good cannot be produced without reducing the output of another good Opportunity Cost: The cost of something is what you give up to gain it. Ratio: Give up/Gain

OPPORTUNITY COSTS ALL costs are opportunity costs. The cost of anything is what must be given up to get it. The cost of more shoes is fewer shirts. The cost of more shirts is fewer shoes. The cost of more health care is less education. The cost of more education is less health care. The cost of more private goods (cars) is fewer government services

MARGINAL COST The opportunity cost of one more unit of a good That is, what you must give up to gain one more unit of something To gain the fourth shoe you must give up five shirts. When shoe production is at 4 units, the marginal cost of a shoe is five shirts.

Marginal Benefit The marginal benefit of a good or service is the benefit received from consuming one more unit of it. We measure marginal benefit by the amount that a person is willing to pay for an additional unit of a good or service. 2-7

MARGINAL BENEFIT Generally, the more we have of any good or service, the smaller its marginal benefit and the less we are willing to pay for an additional unit of it. We call this general principle the principle of decreasing marginal benefit. A production possibility curve DOES NOT illustrate Marginal Benefit 2-8

Using Resources Efficiently When we cannot produce more of any one good without giving up some other good, we have achieved production efficiency, and we are producing at a point on the PPF. When we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved allocative efficiency, and we are producing at the point on the PPF that we prefer above all other points. 2-9

20 18 -2 1 2/1 shirts 15 -3 2 11 -4 3 4/1 shirts 6 -5 4 5/1 shirts -6 T shirts Change Shoes cost of shoes 20 18 -2 1 2/1 shirts 15 -3 2 3/1 shirts 11 -4 3 4/1 shirts 6 -5 4 5/1 shirts -6 5 6/1 shirts

CALCULATING OPPORTUNITY COSTS Determine the number of units you gain. Determine the number of units you give up. Determine the ratio: give up divided by gain

Example You give up one hour of your time picking blueberries. You gain 3 pounds of blueberries. Give up / Gain 1 hour / 3 lbs. berries The cost of one pound of blueberries is 1/3 of an hour or 20 minutes. = .33 hours/lb of berries. 3. You are a farmer and decide to grow barley instead of wheat. The same inputs are used to grow each type of grain. The cost of each ton of barley is one half a ton of wheat. Give up / Gain 100 tons wheat / 200 tons barley

Example You quit a $12,000 a year job working at Sobeys to hitch hike to Cape Breton and live in a Buddhist monastery. The monks take you in at no charge. Give up / Gain $12,000 / Year at monastery The cost of the year at the monastery is $12,000.

Example You are a farmer and decide to grow barley instead of wheat. Give up / Gain 100 tons wheat / 200 tons barley The cost of each ton of barley is one half a ton of wheat.

Shirts willing to give up Shoes Cost in shirts Shirts willing to give up MC MB 1 2 8 3 6 4 5