1. Copyright ©2006 by Thomson South-Western. All rights reserved. Contemporary Economics: An Applications Approach By Robert J. Carbaugh Chapter 1: Scarcity and Choice

2. Carbaugh, Chap. 1 2 Opportunity cost and choice Scarcity and Opportunity Cost Number of compacts Number of minivans D C B A E Car-wash possibilities 0 20 40 60 80 010203040

3. Carbaugh, Chap. 1 3 Production possibilities curve Opportunity Cost Possible combinations of computers and VCRs Computers (millions) A B C D Production possibilities curve (PPC) Points along PPC imply no unemployed resources and efficient production Attainable and unattainable production combinations Computers (millions) A B C D Production possibilities curve (PPC) Inefficient Unattainable F E Foregone output 0 1 2 3 4 5 6 0123 VCRs (millions) 0 1 2 3 4 5 6 0123

4. Carbaugh, Chap. 1 4 Law of increasing opportunity cost Opportunity Cost Computers (millions) A B C D A bowed outward PPC illustrates increasing opportunity costs 0 1 2 3 4 5 6 0123 VCRs (millions)

5. Carbaugh, Chap. 1 5 Changes in the PPC Economic growth on the PPC Computers (millions) G F C E Economic growth is illustrated by an outward shift in a nation’s PPC PPC 1 PPC 0 0 3 02 VCRs (millions)

6. Carbaugh, Chap. 1 6 Economic growth in U.S. and Japan United States Consumer goods (hamburgers) Economic Growth A Next year's production possibilities This year's production possibilities PPC 1 PPC 0 The U.S. choice to produce more consumer goods (point A) limits future production growth Japan Consumer goods (hamburgers) A´ Next year's production possibilities This year's production possibilities PPC 1 PPC 0 Japan's choice to favor capital goods (point A) will shift its future PPC farther out Capital Goods (machinery)

7. Carbaugh, Chap. 1 7 Opportunity cost of national security Economic Growth Security Goods F PPC 0 PPC 1 G E Nonsecurity Goods

8. Carbaugh, Chap. 1 8 Economic sanctions Economic Growth Iraq Machines A (before sanctions) (after sanctions) PPC 1 PPC 0 Oil (barrels)

9. Carbaugh, Chap. 1 9 Revised grading standard Shifting relationships Initial grading standard Reading Tables & Graphs Hours of study time per week

10. Carbaugh, Chap. 1 10 Fundamental economic questions Economic Systems Scarcity Fundamental economic questions: - What to produce? - How to produce? - For whom to produce? Type of economic system: - Market economy - Command economy - Mixed economy Imposes Answered by

11. Carbaugh, Chap. 1 11 Economic Systems Market economy: circular flow model Resource markets Product markets Business firms Land, labor, capital and entrepreneurship Rent, wages, interest and profits Households Consumption expenditures Goods and services