Economics Today Chapter 2 Scarcity and the World of Trade-Offs Roger LeRoy Miller Economics Today Chapter 2 Scarcity and the World of Trade-Offs

Introduction What seems to be the scarcest thing around? For a lot of people, it is time. You can be the richest person on earth and still not have “enough time.” Why is it valuable to you?

Introduction Evaluate whether even affluent people face the problem of scarcity Understand why economics considers individuals’ wants but not their 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

Chapter Outline Scarcity Wants and Needs Scarcity, Choice, and Opportunity Cost The World of Trade-Offs The Choices Society Faces 6

Chapter Outline Economic Growth and the Production Possibilities Curve The Trade-Off Between the Present and the Future Specialization and Greater Productivity 7

Chapter Outline The Division of Labor Comparative Advantage and Trade Among Nations 8

Did You Know That... Chris Van Horn, president of CVK Group in Washington, D.C. grosses over $200,000 a year for having people wait in line? Why would a “line waiter” get paid $27 an hour standing in line for lobbyists who must attend congressional hearings? 9

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. It is not the same thing as poverty. 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 Natural resources or the gifts of nature Labor The human resource 14

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

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

Scarcity Goods versus Economic Goods Goods are all things from which individuals derive satisfaction and are, thus, valued. Economic goods are goods and services produced from scarce resources. 17

Scarcity Services Tasks that are performed for someone else 18

Scarcity Recall Scarcity occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants. 19

Wants and Needs Needs (from the economic perspective) Wants Are objectively undefinable Could be a wish, want, or a life-saving necessity Wants Desirable goods that people wish to have People have unlimited wants 20

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 Questions What is the opportunity cost of attending this economics class? What is the opportunity cost of attending a Rolling Stones concert? What is the opportunity cost of increasing research for an AIDS vaccine? 22

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

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

Scarcity, Choice, and Opportunity Cost Opportunity cost and a national monument Allocating land between public and private use The trade-off between the use of land for recreation or for coal Question What does the market value of coal under the National Monument tell us about the perceived social value of the monument? 25

The World of Trade-Offs Whenever resources are used for any activity, the user is trading off the opportunity to use those resources for other things. 26

The World of Trade-Offs Opportunity cost graphically: The production possibilities curve (PPC) represents all possible combinations of total output that could be produced. There is a fixed amount of productive resources of a given quality being used efficiently. 27

Production Possibilities Curve (PPC) Figure 2-1

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 is for a specific time period Resources are fixed for the time period Technology does not change over the time period 30

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

Society’s Trade-Off Between Network Computers and Digital Televisions Figure 2-2, Panel (a)

Society’s Trade-Off Between Network Computers and Digital Televisions Figure 2-2, Panel (b)

The Law of Increasing Relative Costs Figure 2-3

The Choices Society Faces Law of Increasing Relative Costs As society attempts to produce more of a good, the opportunity cost of additional units 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 network computers and digital televisions Occurs over a period of time Is illustrated by an outward shift of the production possibilities curve 37

Economic Growth Allows for More of Everything Figure 2-4

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 5 B Capital Goods per Year A 4 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 Today Recreation per Year Food per Year C Capital Goods per Year A B 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 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 Figure 2-5

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

Specialization and Greater Productivity Division of productive activities Leads to greater productivity 45

Specialization and Greater Productivity Absolute Advantage The ability to produce more units of a good or using a given quantity of labor or service resource inputs 46

Specialization and Greater Productivity Comparative Advantage The ability to produce a good or service at a lower opportunity cost A relative concept Specialize in the production for which we have a comparative advantage 47

Why Foreign Graduate Students Specialize When Studying in the United States Question How can the concept of comparative advantage help us to understand why foreign students in the U.S. choose scientific degrees and American students choose professional degrees? 48

Division of Labor Division of Labor Examples 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 49

Comparative Advantage and Trade Among Nations Question Why trade? Answer Comparative advantage and specialization increases output and income 50

Comparative Advantage and Trade Among Nations Examples Trade in U.S. between agricultural states and manufacturing states Question Why limit trade among nations? 51

What is the value of time spent with children? Issues and Applications: The Costs of Raising a Child Are Not the Same for Everyone What is the value of time spent with children? What is the opportunity cost of raising a child? 52

The Full Cost of Raising a Child Figure 2-6

Web Links The following Web links appear in the margin of this chapter in the textbook: http://www.public-policy.org/~ncpa/pd http://www.wto.org

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 goods on which we place a positive value 54

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 55

Summary Discussion of Learning Objectives There is a trade-off between consumption of goods and capital goods Absolute versus comparative advantage 56

Summary Discussion of Learning Objectives 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. 57

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