Chapter 1 Economics and the World of Scarcity Chapter 1 Economics and the World of Scarcity

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-2 Learning Objectives Understand the difference between needs and wants. Understand why scarcity exists. Determine how one measures opportunity cost. Show the relationship between opportunity cost, trade-offs, and the production possibilities curve. Show the relationship between the production possibilities curve and economic growth.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-3 Economics Economics is a social science that studies how people allocate their limited resources to try to satisfy their unlimited wants. Economics is the study of how people make choices.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-4 Needs vs. Wants The term need applies to the bare minimum physical necessities that allow you to survive: bare minimum of basic food, shelter, and clothing.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-5 Needs vs. Wants Wants include those desires that you are able and also unable to pay for. They are unlimited.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-6 Scarcity Scarcity exists because nature does not provide us with all of the resources required to satisfy our unlimited wants. For many people, the scarcest resource they face is time.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-7 Goods and “Bads” Goods are defined as those items that give us satisfaction when we consume them. Examples include a sandwich, a cup of coffee, a warm sweater, etc.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-8 Goods and “Bads” “Bads” are the byproducts of production and consumption that we would prefer to do without. They include pollution of any type, such as smog.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-9 Scarcity and Decision Making Scarcity forces us to make choices. When we decide to do anything, we are implicitly deciding against doing something else. In other words, we are giving up an opportunity.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-10 Opportunity Cost The opportunity cost of every economic decision we make is the value of the next-best alternative. It is the value of the alternative that we had to forgo, or do without, for the decision or choice we made.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-11 Scarcity and Trade-offs Scarcity forces us to make choices. When we change our mind, and choose a different alternative, we face a trade- off.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-12 Scarcity and Trade-offs Trade-off is the sacrifice of one good or service to purchase or produce another good or service.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-13 Resources Resources are things (goods or services) used to produce other goods and services to satisfy people’s wants.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-14 Production Possibilities Most businesses can use their resources and technology to produce different goods or services. When businesses produce more of one good or service, they must produce less of another.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-15 The Production Possibilities Curve (PPC) The PPC is a graphical representation of the maximum combination of two goods or services that can be produced, given a fixed amount of resources and technology.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-16 Figure 1-1: PPC for Camcorders and DVD Recorders

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-17 Efficiency vs. Inefficiency Combinations along the PPC mean that the economy is producing its maximum output with given technology and resources. Those combinations represent productive efficiency.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-18 Efficiency vs. Inefficiency Any point below the PPC represents an inefficient point or output combination, where some resources are being wasted.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-19 Military Goods vs. Civilian Goods: a Real Trade-Off for the U.S. The U.S. is the only military superpower in the world. At times of peace, the United States economy produces relatively more civilian goods than military goods. A different production combination is chosen when the country goes to war.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-20 Figure 1-2: Military Goods vs. Civilian Goods

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-21 Economic Growth and the PPC Economic growth is defined as an increase in output produced by a nation, and can be graphically depicted as an increase in the production possibilities of a nation.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-22 Figure 1-3: The Effects of Economic Growth on the PPC

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-23 Rational Self-interest A key assumption used by economists when formulating economic theories or models is rational self-interest. It is often misinterpreted as fostering selfishness to pursue just one’s monetary wealth.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-24 Rational Self-Interest (cont.) This assumption also refers to individuals pursuing goals relating to prestige, friendship, love, power, helping others, creating works of art, and many other matters that make them and those around them better-off.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.1-25 Key Terms and Concepts economic growth economics productive efficiency goods inefficient point needs opportunity cost production possibilities curve (PPC) rational self-interest resources scarcity trade-off wants