Managing Scarce Resources

Objectives To be able to describe The Economic Problem To understand the factors of production as economic resources To be able to explain the concept of opportunity cost

What is Economics About? Wants and needs Scarcity Choice Opportunity Cost

The worlds resources are scarce but human wants are infinite so choices have to be made about What to produce Who to produce it for How to produce it This is known as the Economic Problem The science of Economics involves advising how best to use scarce resources to make goods and services to satisfy as many wants as possible

The Economic Problem What goods and services should an economy produce? Should the emphasis be on agriculture, manufacturing or services? Should it be on sport and leisure or housing? How should goods and services be produced? Labour, land or capital intensive? Efficiency? Who should get the resources that the economy has produced? Even distribution, more for the rich? More for those who work hard? Free or planned economic systems?

The Economic Problem thus the study of Economics would not exist if Resources were infinite Human wants were limited

Conflicts of Interest If scarce resources are used in one way they cannot be used in another way Example building a road may satisfy people commuting to work, but using land for this purpose means it cannot be used in another way, for example as farmland. This does not satisfy the wants of farmers and nature lovers

Value Judgements Opinions of what is ‘good’, ‘bad’, ‘right’ or ‘wrong’ Normative statements Eg. ‘The UK should join the single currency’

Words that indicate a value judgement…. Statements that can be proved against facts are called positive statements Eg. ‘There are over 4 million people unemployed’ can be tested against fact

Task Positive or Normative Statement? 1.Prices are on average rising by 10% a year 2.Wealth should be more equally distributed 3.A tax on wealth would reduce differences in people’s wealth 4.Old age pensions ought to be increased 5.An increase in pensions would cause an increase in spending in the economy 6.An increase in taxation on petrol will reduce the quantity of petrol sold 7.If wages were lower firms would employ more workers 8.Using scarce resources involves an opportunity cost 9.We should use fewer resources today so that we will have some left for the future

Opportunity Cost Making choices involves going without something else Opportunity cost is the next best alternative forgone when an economic decision is made (learn definition and use) It is the true cost of a decision as it represents what has been sacrificed

Questions What is the opportunity cost of –You studying IB Economics –Buying an Economics textbook –Spending an hour doing your Economics homework

More detail on the economic problem…

Free and Economic Goods Most products are economic or scarce goods as limited resources have been used to make them Free goods do not require scarce resources to make eg. Sunlight –Do not confuse with goods such as the NHS where patients do not have to pay for treatment- scarce resources were needed to provide this service

The Economic Problem Land Labour Capital Enterprise Finite resources Infinite wants Choices What, how, for whom?

Economic Resources Land -All natural resources that can be used to produce goods and services. (Incl. forests, fish, oil) Labour - All human effort, physical and mental used in the production of goods and services

Capital -Capital goods: man-made goods that are used to produce other goods and services eg. Factories, offices, warehouses, railways etc. Capital goods (also known as Producer goods) are distinct from Consumer goods Note- in economics Capital is not shares, bank accounts etc (these are financial assets). Capital is physical assets Enterprise - The entrepreneur takes risks and organises the other economic resources

Issues with the factors of production What might affect a country’s choice in what to produce? -Land -Labour -Capital -Enterprise

Note Economists have to assume consumers act rationally hence that consumers spend their scarce resources in a way that will maximise the benefit (utility) that they gain from their expenditure Consumers are considered to be utility maximisers

Production Possibility Curves Analytical tools to show the concepts of scarcity, choice and opportunity cost Show the maximum output of a combination of two types of product that can be produced with current resources and technology Production Possibility Frontiers, Opportunity Cost Curve (PPCs, PPFs)

D and E are unattainable B and C are attainable but means there is unemployment or underemployment of some resources (inefficiencies) Capital Goods Consumer Goods PPC 1 A B C E D Scarcity of economic resources limits output to points on or below the PPC When an economy is producing on its PPC it is working to it’s full capacity and making full use of it’s economic resources. Such a point is described as productively efficient

Economy Z Capital Goods (K) millions of tonnes Consumer Goods (C) (millions of tonnes) PPC A Point A= 30m K, 50m C Move to B to gain 10m C ‘costs’ 30m K Thus the opportunity cost of 1m tonnes of consumer goods is 3m tonnes of capital goods B

Capital Goods Consumer Goods Economy Z At point A Economy Z can produce x 1 of Consumer goods and y 1 of Capital goods y1y1 y2y2 x1x1 x2x2 A B PPC 1 To increase output of capital goods from y 1 to y 2, x 1 -x 2 of consumer goods must be sacrificed Hence PPCs can be used to demonstrate opportunity cost

Capital Goods Consumer Goods y1y1 x1x1 x2x2 Shifts in PPCs PPC 2 PPC 1 A B Over time most countries’ productive capacity increases- quantity and quality of resources increases, better educated and trained workforce and the quantity of capital goods increases

Capital Goods Consumer Goods PPC 2 PPC 1 A B Actual and Potential Economic Growth C A to B and A to C are Actual Economic growth (an increase in output) PPC1 to PPC2 represent potential economic growth (an increase in a country’s potential capacity)

In the UK in 2001 the cull of cows, sheep and pigs to fight the outbreak of foot and mouth disease reduced the country’s ability to produce agricultural products If there is a change in the quantity or quality of resources that are specific to the production of one type of product, the slope of the PPC will change Agricultural Products Manufactured Goods PPC 1 PPC 2

Quick Quiz Tues 18 th Sept 1.What is the ‘economic problem’ (3 marks) 2.What is meant by a ‘normative statement’? Give an example (2 marks) 3.What are the 4 factors of production? Give an example of each (8 marks) 4.Define opportunity cost (2 marks)

More on PPCs…

Notes on PPCs Most PPCs curve outwards from the origin This shows that as more of one product is produced, the opportunity cost of extra units of it increases (diminishing returns) This is because some resources are better suited to making one type of good In a few cases where economic resources are equally good at producing both types of products, the opportunity cost will be constant, hence the PPC will be a straight downward sloping line

Economy Z Capital Goods Consumer Goods (millions) PPC A Point A= 30m K, 50m C Move to B to gain 10m C ‘costs’ 30m K At point C however, to gain 10m C we only have to sacrifice 1m K Thus the opportunity cost changes along the curve B C

Handout The shape of the PPC