1. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Fundamental Economic Problem: Scarcity and Choice Our necessities are few but our wants are endless. INSCRIPTION ON A FORTUNE COOKIE

2. Scarcity, Choice, Opportunity Cost Resources; inputs; factors of production –Instruments provided by nature or people –Used to create goods & services Scarcity –Resources are always limited 2 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Scarcity, Choice, Opportunity Cost Resources –Land (Natural resources) Minerals, soil, water, & air –Labor Workers –Capital Factories, machines Resources made by people 3 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Scarcity, Choice, Opportunity Cost All resources are scarce –People have less of them than they would like Choices must be made –Among a limited set of possibilities –A decision to have more of one thing means that people will have less of something else 4 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. Scarcity, Choice, Opportunity Cost Labor – scarce –Time limitations –Number of skilled workers – limited Economics –The study of how best to use limited means to pursue unlimited ends Opportunity cost of any decision –The value of the next best alternative forgone 5 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. How much does it really cost? Principle of opportunity cost –Options available Households & businesses Governments & entire societies –Given - limited resources –Logic of How people can make optimal decisions From among competing alternatives 6 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. How much does it really cost? With limited resources –Decision to have more of one thing Is a decision to have less of something else Relevant cost of any decision –Opportunity cost Value of next best alternative given up Optimal decision making –Based on opportunity-cost calculations 7 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. Scarcity, Choice, Opportunity Cost When the market functions well –Goods with high opportunity costs Have high money costs –Goods with low opportunity costs Have low money costs 8 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Scarcity, Choice, Opportunity Cost Opportunity cost vs. explicit monetary cost –When the market does not function well Assigns prices that do not accurately reflect opportunity costs –Some valuable items - no explicit price tag Market value of your time 9 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Scarcity, Choice, Opportunity Cost Optimal decision –Best serves objectives of decision maker –Selected by explicit or implicit comparison with possible alternative choices Optimal decision making –Consumers, producers, and sellers –Marginal analysis 10 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Scarcity & Choice: a Single Firm Outputs – produced by firm or economy –Goods & services it produces Inputs - used by firm or economy –Labor, raw materials, electricity, other resources –Used to produce outputs 11 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. Scarcity & Choice: a Single Firm One business firm –Fixed supply of inputs –Given technology –Produce two outputs Produce more of one output Produce less of the other 12 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. Table 1 Production Possibilities Open to a Farmer 13 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. Scarcity & Choice: a Single Firm Production possibilities frontier –Different combinations of various goods –Given Available resources Existing technology –Slopes downward to right –Points on or inside: Attainable –Points outside: Cannot be achieved 14 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. Figure 1 Production possibilities frontier for production by a single farmer 15 1020300 Wheat 6065 10 20 Soybeans 30 40 A E D Unattainable region Attainable region 38 52 C B © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. Scarcity & Choice: a Single Firm Production possibilities frontier –Bowed outward –Resources – specialized Slope of production possibilities frontier –Opportunity cost Principle of increasing costs –As production of a good expands –Opportunity cost of producing another unit Generally increases 16 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. Figure 2 Production Possibilities Frontier without Specialized Resources 17 1020300 Brown shoes 4050 10 20 Black shoes 30 40 50 A B C D © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Scarcity & Choice: a Single Firm Concentrate more of productive capacity –On one commodity –Employ inputs Better suited to making another commodity –Vary proportions of inputs Limited quantities of some inputs –Bowed outward Production possibilities frontier 18 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. Scarcity & Choice: Entire Society Economy – constrained by –Resources and technology Production possibilities frontier – society –Position & shape –Determined by economy’s Physical resources, skills, technology Willingness to work Past: construction of factories, research, and innovation 19 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. Figure 3 Production Possibilities Frontier for the Entire Economy 20 1002003000 Missiles per Year 400500 100 200 Thousands of Automobiles per Year 300 400 500 600 700 D B C F G E © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. Scarcity & Choice: Entire Society Production possibilities frontier –Civilian consumption (automobiles) –Military strength (missiles) –Downward slope - Choices Increase civilian consumption Decreasing military expenditure –Bowed outward As defense spending increases –More expensive - “buy missiles” –Sacrifice civilian consumption 21 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. The Concept of Efficiency Efficiently produced output –Given current technology –Cannot increase output production Without increasing amount of inputs Or giving up a quantity of other output Efficiency –Absence of waste 22 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

23. The Concept of Efficiency Efficient economy –Wastes none of available resources –Produces maximum amount of output its technology permits 23 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24. Three Coordination Tasks Allocation of resources –Society’s decisions –Divide scarce input resources –Among different outputs produced –Among different firms / organizations Produce outputs 24 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25. Three Coordination Tasks 1.How to utilize resources efficiently –Reach production possibilities frontier 2.Which of the possible combinations of goods to produce –Select one point on production possibilities frontier 3.How much of the total output of each good to distribute to each person 25 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

26. Task 1 How the market fosters efficient resource allocation Division of labor –Break up a task Smaller, more specialized tasks Each worker – more adept at a particular job 26 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

27. Task 1 How the market fosters efficient resource allocation Law of comparative advantage –One country - production of particular good Relative to other goods –If it produces that good less inefficiently Than it produces other goods –Compared with other country 27 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. Principle of comparative advantage One country Even if is worse than another country in the production of every good –Has a comparative advantage In making the good at which it is least inefficient - compared to the other country Two countries can gain by trading Even if one country is more efficient than another in the production of every commodity 28 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

29. Principle of comparative advantage A country can gain –By importing a good from abroad –Even if that good can be produced more efficiently at home –Specialize in producing those goods at which it is even more efficient The less efficient country –Should specialize in exporting the goods in whose production it is least inefficient 29 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

30. Task 2 Market exchange and deciding how much of each good to produce Market mechanism –Comparative advantage & division of labor - greater productivity –Trade goods for other goods Common item: money –How much of each good should be produced 30 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

31. Task 3 How to distribute the economy’s outputs among consumers Market system –Form of economic organization –Resource allocation decisions Individual producers and consumers Their own best interests Without central direction 31 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

32. Task 3 How to distribute the economy’s outputs among consumers Society - many important goals –Produce goods and services with maximum efficiency Minimize waste –Markets - operate more or less freely 32 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.