Learning Objectives Evaluate whether even affluent people face the problem of scarcity Understand why economists consider wants but not needs 3

Learning Objectives Explain why the scarcity problem induces individuals to consider opportunity costs Discuss why obtaining increasing increments of any particular good entails giving up more and more units of other goods 4

Learning Objectives Explain why society faces a trade-off between consumption of goods and capital goods Distinguish between absolute and comparative advantage 5

Scarcity Scarcity Occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants 10

Scarcity What scarcity is NOT: It is not a shortage. 11

Scarcity Production Resources or Factors of 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 12

Scarcity Resources or Factors of Production Land Labor Capital Entrepreneurship 14

Scarcity Resources or Factors of Production Land Labor Natural resources or the gifts of nature Labor The human resource 14

Scarcity Resources or Factors of Production Capital Physical Capital All manufactured resources Human Capital Accumulated training and education of workers 15

Scarcity Resources or Factors of Production Entrepreneurship Person who organizes, manages, and assembles the other resources Risk taker Maker of basic business policy decisions 16

Scarcity Goods Services Goods are all things from which individuals derive satisfaction and are, thus, valued. Services Tasks that are performed for someone else 17

Scarcity, Choice, and Opportunity Cost The highest-valued, next-best alternative that must be sacrificed to attain something or satisfy a want 21

Scarcity, Choice, and Opportunity Cost In economics, cost is always a forgone opportunity. 23

Scarcity, Choice, and Opportunity Cost Questions What is the opportunity cost of attending this economics class? What is the opportunity cost of attending a Dave Matthews concert? What is the opportunity cost of increasing research for a vaccine? 22

Scarcity, Choice, and Opportunity Cost Limited Resources & Unlimited Wants Scarcity Choices Opportunity Cost

The World of Trade-Offs Opportunity cost graphically: The production possibilities curve (PPC) represents all possible combinations of total output that could be produced. Along the production possibilities curve = efficiency 27

Production Possibilities Curve (PPC)

Production Possibilities Curve (PPC) Questions What would happen to the production possibilities curve if you spent more time studying? What would happen to the potential grades? Is it possible that the trade-off might not be constant? 29

The Choices Society Faces Production possibilities assumptions Resources are fully employed Production, Resources, and Technology do not change over the time period. 30

Society’s Trade-Off Between Digital Cameras and Pocket PCs

Society’s Trade-Off Between Digital Cameras and Pocket PCs

The Law of Increasing Relative Costs

The Choices Society Faces Law of Increasing Relative Costs As society attempts to produce more of a good, the opportunity cost of additional units of that good generally increases. 35

The Choices Society Faces Question How does the specialization of resources influence the shape of the production possibilities curve? 36

Economic Growth and the Production Possibilities Curve 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 37

The Choices Society Faces Technology Society’s pool of applied knowledge concerning how goods and services can be produced Improving resource productivity 31

Economic Growth Allows for More of Everything

The Trade-Off Between the Present and the Future The PPC can be used to illustrate the trade-off between present and future consumption. Consumption The use of goods and services for personal satisfaction 39

Capital Goods and Growth Consumer goods Goods produced for personal satisfaction Capital goods Goods used to produce other goods Capital Goods per Year A B 4 5 Consumption Goods per Year ($ trillions)

Capital Goods and Growth Future growth as a result of A on the left-hand diagram Capital Goods per Year A Recreation per Year Today B 4 5 Consumption Goods per Year ($ trillions) Food per Year

Capital Goods and Growth Future growth as a result of C on the left-hand diagram C Capital Goods per Year Recreation per Year A Today B Consumption Goods per Year ($ trillions) Food per Year

Capital Goods and Growth Future growth as a result of A on the left-hand diagram Capital Goods per Year A Recreation per Year Today B 4 5 Consumption Goods per Year ($ trillions) Food per Year Future growth as a result of C on the left-hand diagram C Capital Goods per Year A Recreation per Year Today B Consumption Goods per Year ($ trillions) Food per Year

Capital Goods and Growth Observations Forgo consumption goods to produce capital goods Increase in capital goods stimulates economic growth 43

Capital Goods and Growth Observations In the future the economic system can produce more consumer goods An increase in capital goods will lead to a higher rate of economic growth in the future 44

Why So Many People Don’t Vote