Fundamental Concepts Fundamental Concepts Scarcity, Choices, Opportunity Cost, and Production Possibilities Models

Unlimited Needs and Limited Resources leads to Scarcity Because all societies, governments, and individuals face this dilemma, choices must be made. Each choice, whether all of one or all of the other (or some tradeoff in between) has a resulting opportunity cost.

Production Possibilities All of the things that could be produced in an economy given the available productive resources.

In a theoretical economy with only two goods, a choice must be made between how much of each good to produce. Economic Models

In order to produce more of one item, a reduction in production of the other item must occur and vice versa.

Robinson Crusoe

Each day, Crusoe can catch four fish or gather eight coconuts. He cannot have both four fish and eight coconuts due to time and energy constraints.

The cost of anything is what is given up in order to get that thing.

FISHCOCONUTS Production Possibilities Schedule

FISH COCONUTS 4 4 Production Possibilities Frontier

The slope of the graph measures the opportunity costs facing Robinson Crusoe. Click for a few clips from the 1964 film version

FISH COCONUTS 4 4 Production Possibilities Frontier X O Currently NOT possible Possible but NOT Efficient