1. 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

2. 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?

3. Introduction
Evaluate whether even affluent people face the problem of scarcity
Understand why economics considers individuals’ wants but not their needs 3

4. 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

5. Learning Objectives
Explain why society faces a trade-off between consumption of goods and capital goods
Distinguish between absolute and comparative advantage 5

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

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

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

9. 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

10. Scarcity
Scarcity
Occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants 10

11. Scarcity What scarcity is NOT: It is not a shortage.
It is not the same thing as poverty. 11

12. 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

13. Scarcity Resources or Factors of Production Land Labor
Natural resources or the gifts of nature
Labor
The human resource 14

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

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

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

17. Scarcity
Services
Tasks that are performed for someone else 18

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

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

20. Scarcity, Choice, and Opportunity Cost
The highest-valued, next-best alternative that must be sacrificed to attain something or satisfy a want 21

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

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

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

24. 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

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

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

27. Production Possibilities Curve (PPC)
Figure 2-1

28. 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

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

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

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

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

33. The Law of Increasing Relative Costs
Figure 2-3

34. 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

35. The Choices Society Faces
Question
How does the specialization of resources influence the shape of the production possibilities curve? 36

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

37. Economic Growth Allows for More of Everything
Figure 2-4

38. 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

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)

40. 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

41. 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)

42. 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

43. Capital Goods and Growth
Observations
Forgo consumption goods to produce capital goods
Increase in capital goods stimulates economic growth 43

44. 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

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

46. 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

47. 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

48. 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

49. 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

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

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

52. 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

53. The Full Cost of Raising a Child
Figure 2-6

54. Web Links
The following Web links appear in the margin of this chapter in the textbook:

55. 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

56. 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

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

58. 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

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