Chapter 2 - Scarcity and the World of Trade-Offs Learning Objectives Evaluate whether even affluent people face the problem of scarcity Understand why economists consider wants but not needs Explain why the scarcity problem induces individuals to consider opportunity costs Chapter 2 - Scarcity and the World of Trade-Offs 3

Chapter 2 - Scarcity and the World of Trade-Offs Learning Objectives Discuss why obtaining increasing increments of any particular good entails giving up more and more units of other goods Explain why society faces a trade-off between consumption goods and capital goods Distinguish between absolute and comparative advantage Chapter 2 - Scarcity and the World of Trade-Offs 4

Chapter 2 - Scarcity and the World of Trade-Offs Is the most basic concept in all of economics Occurs when the ingredients for producing things that people desire are insufficient to satisfy all wants Means we never have enough of everything, including time, to satisfy our every desire Chapter 2 - Scarcity and the World of Trade-Offs 10

Chapter 2 - Scarcity and the World of Trade-Offs What scarcity is NOT It is not a shortage. It is not the same thing as poverty. Chapter 2 - Scarcity and the World of Trade-Offs 11

Chapter 2 - Scarcity and the World of Trade-Offs 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 Chapter 2 - Scarcity and the World of Trade-Offs 12

Chapter 2 - Scarcity and the World of Trade-Offs Resources or Factors of Production Land Natural resources or the gifts of nature Labor The human resource Chapter 2 - Scarcity and the World of Trade-Offs 14

Chapter 2 - Scarcity and the World of Trade-Offs Resources or Factors of Production Physical Capital All manufactured resources Human Capital Accumulated training and education of workers Chapter 2 - Scarcity and the World of Trade-Offs 15

Chapter 2 - Scarcity and the World of Trade-Offs Resources or Factors of Production Entrepreneurship Person who organizes, manages, and assembles the other resources Risk taker Maker of basic business policy decisions Chapter 2 - Scarcity and the World of Trade-Offs 16

Chapter 2 - Scarcity and the World of Trade-Offs Economic Goods Scarce goods, for which the quantity demanded exceeds the quantity supplied at zero price. Chapter 2 - Scarcity and the World of Trade-Offs 17

Chapter 2 - Scarcity and the World of Trade-Offs Services Tasks that are performed for someone else Can be referred to as intangible goods Chapter 2 - Scarcity and the World of Trade-Offs 18

Chapter 2 - Scarcity and the World of Trade-Offs Scarcity occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants. Chapter 2 - Scarcity and the World of Trade-Offs 19

Chapter 2 - Scarcity and the World of Trade-Offs Wants and Needs Needs To economists, the term need is not definable. Wants Goods and services on which we place a positive value People have unlimited wants. Chapter 2 - Scarcity and the World of Trade-Offs 20

Scarcity, Choice, and Opportunity Cost The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want Chapter 2 - Scarcity and the World of Trade-Offs 21

Scarcity, Choice, and Opportunity Cost Questions What is the opportunity cost of attending this economics class? What is the opportunity cost of attending a concert by your favorite band? What is the opportunity cost of increasing research for an AIDS vaccine? Chapter 2 - Scarcity and the World of Trade-Offs 22

Scarcity, Choice, and Opportunity Cost Limited Resources & Unlimited Wants Scarcity Choices Opportunity Cost Chapter 2 - Scarcity and the World of Trade-Offs

Chapter 2 - Scarcity and the World of Trade-Offs E-Commerce Example: Making It Easier to Get to the “Submit Order” Button About half of all consumers who placed items in online “shopping carts” abandon them before authorizing payment. To reduce the opportunity cost of purchasing online, Internet sellers are simplifying the checkout process. For an Internet retailer, what is the opportunity cost of failing to simplify its software in a way that encourages consumers to finalize orders? Chapter 2 - Scarcity and the World of Trade-Offs 25

The World of Trade-Offs Whenever you engage in any activity, using any resource, you are trading off the use of that resource for one or more alternative uses. The value of the trade-off is represented by the opportunity cost, (that which you give up to obtain something else). Chapter 2 - Scarcity and the World of Trade-Offs 26

The World of Trade-Offs Opportunity cost graphically The production possibilities curve (PPC) represents all possible maximum combinations of total output that could be produced. Along the production possibilities curve, there is a fixed quantity of productive resources of a given quality being used efficiently. Chapter 2 - Scarcity and the World of Trade-Offs 27

Chapter 2 - Scarcity and the World of Trade-Offs Production Possibilities Curve for Grades in Mathematics and Economics (Trade-Offs) Chapter 2 - Scarcity and the World of Trade-Offs

Production Possibilities Curve (PPC) Questions What would happen to the production possibilities curve if you spent more time studying? What would happen to your potential grades? Is it possible that terms of the trade-off might not be constant? Chapter 2 - Scarcity and the World of Trade-Offs 29

The Choices Society Faces PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs At the individual level At the societal level Chapter 2 - Scarcity and the World of Trade-Offs

Society’s Trade-Off Between Digital Cameras and Pocket PCs Chapter 2 - Scarcity and the World of Trade-Offs

Society’s Trade-Off Between Digital Cameras and Pocket PCs Chapter 2 - Scarcity and the World of Trade-Offs

The Choices Society Faces Production possibilities assumptions Resources are fully employed Production takes place over a specific time period Resources are fixed for the time period Technology does not change over the time period Chapter 2 - Scarcity and the World of Trade-Offs 30

The Choices Society Faces Technology Society’s pool of applied knowledge concerning how goods and services can be produced Chapter 2 - Scarcity and the World of Trade-Offs 31

The Choices Society Faces Efficiency The case in which a given level of inputs is used to produce the maximum output possible Alternatively, the situation in which a given output is produced at minimum cost Chapter 2 - Scarcity and the World of Trade-Offs 35

The Choices Society Faces Inefficient Point Any point below the production possibilities curve at which the use of resources is not generating the maximum possible output Law of Increasing Relative Cost As society attempts to produce more of a good, the opportunity cost of additional units of that good generally increases Accounts for bowed shape of the PPC Chapter 2 - Scarcity and the World of Trade-Offs

The Law of Increasing Relative Cost Chapter 2 - Scarcity and the World of Trade-Offs

The Choices Society Faces In general, the more specialized the resources, the more bowed the PPC Chapter 2 - Scarcity and the World of Trade-Offs 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 Chapter 2 - Scarcity and the World of Trade-Offs 37

Economic Growth Allows for More of Everything Chapter 2 - Scarcity and the World of Trade-Offs

The Trade-Off Between the Present and the Future PPC Can be used to illustrate the trade-off between present and future consumption Consumption The use of goods and services for personal satisfaction Chapter 2 - Scarcity and the World of Trade-Offs 39

Capital Goods and Growth Consumer goods Goods produced for personal satisfaction Capital goods Goods used to produce other goods Chapter 2 - Scarcity and the World of Trade-Offs

Capital Goods and Growth Observations Increase in capital goods stimulates economic growth An increase in capital goods at present will lead to a higher rate of economic growth in the future. In the future, the economic system can produce more consumer goods. Chapter 2 - Scarcity and the World of Trade-Offs 43

Specialization and Greater Productivity Organization of economic activity among different individuals and regions Leads to greater productivity Chapter 2 - Scarcity and the World of Trade-Offs 45

Specialization and Greater Productivity Comparative Advantage The ability to produce a good or service at a lower opportunity cost Is always a relative concept Chapter 2 - Scarcity and the World of Trade-Offs 47

Specialization and Greater Productivity Absolute Advantage The ability to produce more units of a good or service using a given quantity of labor or resource inputs Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs Chapter 2 - Scarcity and the World of Trade-Offs 46

Chapter 2 - Scarcity and the World of Trade-Offs Division of Labor Rational individuals choose their comparative advantage and specialize. Specialization leads to division of labor. Chapter 2 - Scarcity and the World of Trade-Offs

Chapter 2 - Scarcity and the World of Trade-Offs Division of Labor Division of Labor Assigning different workers different tasks to produce a good or service Organizing a division of labor within a firm to increase output Examples Automobile production Hospital operating room Chapter 2 - Scarcity and the World of Trade-Offs

Comparative Advantage and Trade Among Nations Recall Analysis of absolute advantage, comparative advantage, and specialization—applicable to individuals and nations Chapter 2 - Scarcity and the World of Trade-Offs

Comparative Advantage and Trade Among Nations When nations specialize where they have a comparative advantage and then trade with the rest of the world Economic efficiency improves Output increases Average standard of living rises Chapter 2 - Scarcity and the World of Trade-Offs

Chapter 2 - Scarcity and the World of Trade-Offs International Example: Multiple Comparative Advantages in Dishwasher Production Maytag dishwashers assembled in Jackson, Tennessee contain components manufactured throughout the world. Some may consider it a plus to buy an appliance labeled “Made in the USA,” but the overall cost of the dishwasher is lower than it would be if all the individual parts were manufactured within U.S. borders. Chapter 2 - Scarcity and the World of Trade-Offs

Summary Discussion of Learning Objectives The problem of scarcity, even for the affluent Scarcity and poverty are not synonymous. Why economists consider individuals’ wants but not their needs Needs are not objectively definable. Wants are things on which we place a positive value. Chapter 2 - Scarcity and the World of Trade-Offs

Summary Discussion of Learning Objectives Why the scarcity problem leads people to evaluate opportunity costs Allocating resources to producing one good means losing the opportunity to have another one. Why getting more units of one good requires giving up more and more of another Resources are specialized Chapter 2 - Scarcity and the World of Trade-Offs

Summary Discussion of Learning Objectives There is a trade-off between consumption goods and capital goods. As more resources are devoted to the production of capital goods, we can expect the rate of economic growth to increase. Chapter 2 - Scarcity and the World of Trade-Offs

Summary Discussion of Learning Objectives Absolute versus comparative advantage One finds one’s absolute advantage by producing more of a specific good than someone else who uses the same amount of resources. One finds one’s comparative advantage by looking at the activity that has the lowest opportunity cost. Chapter 2 - Scarcity and the World of Trade-Offs