Macroeconomics ECON 2301 Fall 2009 Marilyn Spencer, Ph.D. Professor of Economics Chapter 2

Out-of-Class Quiz #1 By 5 p.m., Thursday, September 3: 1. Create an Islander account. 2. me so that I will have your address. Include your name and your course & section numbers. My address is 4 points

Chapter 2: Scarcity & the World of Trade-offs

Learning Objectives: 1. Evaluate whether even affluent people face the problem of scarcity 2. Understand why economists consider wants but not needs 3. Explain why the scarcity problem induces individuals to consider opportunity costs 4. Discuss why obtaining increasing increments of any particular good entails giving up more and more units of other goods 5. Explain why society faces a trade-off between consumption goods and capital goods 6. Distinguish between absolute and comparative advantage

Chapter Outline 4 Scarcity 4 Wants and Needs 4 Scarcity, Choice, and Opportunity Cost 4 The World of Trade-Offs 4 The Choices Society Faces 4 Economic Growth and the Production Possibilities Curve 4 The Trade-Off Between the Present and the Future 4 Specialization and Greater Productivity 4 Comparative Advantage and Trade Among Nations

Scarcity 4 Scarcity: Üis the most basic concept in all of economics Üoccurs when the ingredients for producing things that people desire are insufficient to satisfy all wants Ümeans we never have enough of everything, including time, to satisfy our every desire 4 What scarcity is NOT: ÜIt is not a shortage. ÜIt is not the same thing as poverty.

Scarcity (cont'd) 4 Production ÜAny activity that results in the conversion of resources into products that can be used in consumption 4 Resources or Factors of Production ÜInputs that are used to produce things that people want

Scarcity (cont'd) 4 Resources or Factors of Production ÜLand Natural resources or the gifts of nature ÜLabor The human resource ÜHuman Capital Accumulated training and education of workers ÜPhysical Capital All manufactured resources ÜEntrepreneurship Person who organizes, manages, and assembles the other resources Risk taker Maker of basic business policy decisions

Scarcity (cont'd) 4 Economic Goods ÜEconomic goods are scarce goods, for which the quantity demanded exceeds the quantity supplied at zero price. 4 Needs ÜTo economists, the term need is not definable. 4 Wants ÜGoods and services on which we place a positive value ÜPeople have unlimited wants.

Scarcity, Choice, and Opportunity Cost 4 Opportunity Cost ÜThe highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want

Scarcity, Choice, and Opportunity Cost (cont'd) 4 Questions: ÜWhat is the opportunity cost of attending this economics class? ÜWhat is the opportunity cost of attending a concert by your favorite band? 4 In economics, cost is always a forgone opportunity.

Limited Resources & Unlimited Wants Scarcity Choices Opportunity Cost Scarcity, Choice, and Opportunity Cost (cont'd)

The World of Trade-Offs (cont'd) 4 Opportunity cost graphically ÜThe production possibilities curve (PPC) represents all possible maximum combinations of total output that could be produced. ÜAlong the production possibilities curve, there is a fixed quantity of productive resources of a given quality being used efficiently.

Figure 2-1 PPC for Grades in Mathematics & Economics (Trade-Offs)

Production Possibilities Curve (PPC) 4 Questions: ÜWhat would happen to the production possibilities curve if you spent more time studying? ÜWhat would happen to your potential grades? ÜIs it possible that terms of the trade-off might not be constant?

The Choices Society Faces 4 PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs ÜAt the individual level ÜAt the societal level

14 th ed.: Figure 2-2 Society’s Trade-Off Between Digital Cameras & Pocket PCs, Panel (a)

Figure 2-2 Society’s Trade-Off Between Digital Cameras and Pocket PCs, Panel (b)

15 th ed.: Figure 2-2 Society’s Trade-Off Between Computer Servers and HDTVs, Panel (a)

Figure 2-2 Society’s Trade-Off Between Computer Servers and HDTVs, Panel (b)

2 nd Extra Credit Opportunity Expect a quiz at the beginning of class, Wednesday, September 9.

The Choices Society Faces (cont'd) 4 Production possibilities assumptions: 1.Resources are fully employed 2.Production takes place over a specific time period 3.Resources are fixed for the time period 4.Technology does not change over the time period

The Choices Society Faces (cont'd) 4 Efficiency ÜThe case in which a given level of inputs is used to produce the maximum output possible ÜAlternatively, the situation in which a given output is produced at minimum cost 4 Inefficient Point ÜAny point below the production possibilities curve at which the use of resources is not generating the maximum possible output

Economic Growth and the PPC 4 Economic growth ÜIncreases the production possibilities of digital cameras and pocket PCs ÜOccurs over a period of time ÜIs illustrated by an outward shift of the production possibilities curve

Figure 2-4 Economic Growth Allows for More of Everything

Refer to the graph below. What is the opportunity cost of moving from pt. B to pt. C? Üa. 200 SUVs. Üb. 400 SUVs. Üc. 200 roadsters. Üd. 400 roadsters.

Production Possibilities Frontiers and Real-world Trade-offs Economic Growth Economic Growth The ability of the economy to produce increasing quantities of goods and services.

Refer to the graph below. Which graph best represents the concept of economic growth? Üa. The graph on the left. Üb. The graph on the right. Üc. Both graphs. Üd. Neither graph.

The Trade-Off Between the Present and the Future 4 PPC can be used to illustrate the trade-off between present and future consumption 4 Consumption ÜThe use of goods and services for personal satisfaction

Figure 2-5 Capital Goods and Growth 4 Consumer goods: Goods produced for personal satisfaction 4 Capital goods: Goods used to produce other goods ÜYou must forgo consumption goods to produce capital goods ÜThe increase in capital goods stimulates economic growth

Figure 2-5 Capital Goods and Growth, Panel (a)

Figure 2-5 Capital Goods and Growth, Panel (b)

Trade Trade The act of buying or selling. Specialization and Gains from Trade

Trade: Specialization and Gains from Trade

Trade: Absolute Advantage vs. Comparative Advantage Absolute advantage The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources. Comparative advantage The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers. Opportunity cost of picking 1 pound of apples Opportunity cost of picking 1 pound of cherries You1 pound of cherries1 pound of apples Your neighbor2 pounds of cherries.5 pound of apples Don’t Confuse Absolute Advantage and Comparative Advantage!!!

Refer to the graphs below. Each graph represents one country. Which country has a comparative advantage in the production of shirts? Üa. Country A. Üb. Country B. Üc. Neither country. Üd. Both countries.

Trade: Comparative Advantage & the Gains from Trade The basis for trade is comparative advantage, not absolute advantage. Individuals, firms, and countries are better off if they specialize in producing goods and services for which they have a comparative advantage and obtain the other goods and services they need by trading.

Extra Credit Opportunity #3 1.Watch or read a transcript of Pres. Obama’s televised Sept. 9 address on health care reform. 2.Before class starts, Wednesday, September 16: a 50-word summary of the economic issues involved. My address is 4 points possible

Assignments to be completed before class September 14: 4 Read Chapter 3 & also read these end-of-chapter problems: Ü14 th ed: 3-1 through 3-5, 3-7, 3-8, 3-10 & 3-15 on pp Ü15 th ed: 3-1 through 3-5, 3-7, 3-8, 3-13 & 3-14 on pp