Introduction. Learning Objectives. Learning Objectives. Chapter 2. Scarcity and the World of Trade-Offs

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1 Chapter 2 and the World of Trade-Offs Introduction Society always faces choices regarding use of its scarce resources. The need to devote more law enforcement resources to antiterrorism efforts means that crimes considered less threatening, such as bank robberies, are on the rise. Slide 2-2 Learning Objectives Learning Objectives Evaluate whether even affluent people face the problem of scarcity Understand why economists consider wants but not needs 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 Slide 2-3 Slide 2-4

2 Learning Objectives Chapter Outline Explain why society faces a trade-off between consumption goods and capital goods Distinguish between absolute and comparative advantage Wants and Needs, Choice, and Opportunity Cost The World of Trade-Offs The Choices Society Faces Slide 2-5 Slide 2-6 Chapter Outline Chapter Outline Economic Growth and the Production Possibilities Curve The Trade-Off Between the Present and the Future The Division of Labor Comparative Advantage and Trade Among Nations Specialization and Greater Productivity Slide 2-7 Slide 2-8

3 Did You Know That The typical worker who commutes by car spends more than 50 hours a year stuck in traffic? You could calculate the cost of this lost time by figuring the earnings lost as traffic delays take time away from being on the job? Occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants Slide 2-9 Slide 2-10 What scarcity is NOT: It is not a shortage. It is not the same thing as poverty. 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 Slide 2-11 Slide 2-12

4 Resources or Factors of Production Land Natural resources or the gifts of nature Labor The human resource Resources or Factors of Production Physical Capital All manufactured resources Human Capital Accumulated training and education of workers Slide 2-13 Slide 2-14 Resources or Factors of Production Entrepreneurship Person who organizes, manages, and assembles the other resources Risk taker Maker of basic business policy decisions 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. Slide 2-15 Slide 2-16

5 Services Tasks that are performed for someone else Recall occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants. Slide 2-17 Slide 2-18 Wants and Needs, Choice, and Opportunity Cost Needs (from the economic perspective) Are objectively undefinable Could be a wish, want, or a life-saving necessity Opportunity Cost The highest-valued, next-best alternative that must be sacrificed to attain something or satisfy a want Wants Desirable things that people wish to have People have unlimited wants Slide 2-19 Slide 2-20

6 , Choice, and Opportunity Cost, 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? In economics, cost is always a forgone opportunity. Slide 2-21 Slide 2-22, Choice, and Opportunity Cost Limited Resources & Unlimited Wants Choices Opportunity Cost Slide 2-23 E-Commerce Example: Making the Move to College There is a commercial website offering for sale all of the items commonly used to furnish dorm rooms. You can order the items online and then have them delivered to your dorm. What criteria would you use in making the choice of whether to purchase and transport the items yourself or have them provided by this web-based enterprise? Slide 2-24

7 The World of Trade-Offs The World of Trade-Offs Whenever resources are used for any activity, the user is sacrificing the opportunity to use those resources for other things. Opportunity cost graphically: The production possibilities curve (PPC) represents all possible maximum combinations of total output that could be produced. Along the production possibilities curve, there is a fixed quantity of productive resources of a given quality being used efficiently. Slide 2-25 Slide 2-26 Production Possibilities Curve (PPC) 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 terms of the trade-off might not be constant? Figure 2-1 Slide 2-27 Slide 2-28

8 The Choices Society Faces 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 Technology Society s pool of applied knowledge concerning how goods and services can be produced Slide 2-29 Slide 2-30 Society s Trade-Off Between Digital Cameras and Pocket PCs Society s Trade-Off Between Digital Cameras and Pocket PCs Figure 2-2, Panel (a) Slide 2-31 Figure 2-2, Panel (b) Slide 2-32

9 The Law of Increasing Relative Costs International Example: Why did the town of Le Lavandou, France, make it illegal to die within city limits unless you owned a cemetery plot? This law reflected the decision of the townspeople not to allocate any more land for the use of cemeteries. In effect, they were choosing a point on the production possibilities curve with respect to the use of one scarce resource: land. Figure 2-3 Slide 2-33 Slide 2-34 The Choices Society Faces The Choices Society Faces Law of Increasing Relative Costs As society attempts to produce more of a good, the opportunity cost of additional units of that good generally increases. Question How does the specialization of resources influence the shape of the production possibilities curve? Slide 2-35 Slide 2-36

10 Economic Growth and the Production Possibilities Curve Economic Growth Allows for More of Everything Economic growth Increases the production possibilities of digital cameras and pocket PCs Occurs over a period of time Is illustrated by an outward shift of the production possibilities curve Slide 2-37 Figure 2-4 Slide 2-38 The Trade-Off Between the Present and the Future Capital Goods and Growth 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 Capital Goods per Year A B Consumer goods Goods produced for personal satisfaction Capital goods Goods used to produce other goods 7 8 Consumption Goods per Year ($ trillions) Slide 2-39 Slide 2-40

11 Capital Goods and Growth Capital Goods and Growth Capital Goods per Year A Recreation per Year Future growth as a result of A on the left-hand diagram Today Capital Goods per Year C A Recreation per Year Future growth as a result of C on the left-hand diagram Today B B 7 8 Consumption Goods per Year ($ trillions) Food per Year Consumption Goods per Year ($ trillions) Food per Year Figure 2-5, Panel (a) Slide 2-41 Figure 2-5, Panel (b) Slide 2-42 Capital Goods and Growth Capital Goods and Growth Observations Forgo consumption goods to produce capital goods Increase in capital goods stimulates economic 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 Slide 2-43 Slide 2-44

12 Specialization and Greater Productivity Specialization Division of productive activities Leads to greater productivity 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 Slide 2-45 Slide 2-46 Specialization and Greater Productivity Division of Labor 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 Division of Labor 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 Slide 2-47 Slide 2-48

13 Comparative Advantage and Trade Among Nations International Example: Comparative Advantage in Dishwasher Production Question Why trade? Answer Comparative advantage and specialization increases output and income Maytag dishwashers assembled in Jackson, Tennessee contain components manufactured throughout the world. Some consumers may consider it a plus to buy an appliance that is labeled Made in the USA, but the overall cost of the dishwasher is lower than it would be if all the individual parts were manufactured within US borders as well. Slide 2-49 Slide 2-50 Issues and Applications: The Trade-off Between Fighting Terrorism and Catching Bank Robbers FBI resources have been reallocated from combating white-collar crime, kidnappings, and illegal drugs towards fighting the terrorist threat. This shift is subject to the law of increasing relative cost. As more law enforcement resources are directed towards counterterrorism efforts, the opportunity cost in terms of traditional law enforcement rises. Summary Discussion of Learning Objectives The problem of scarcity, even for the affluent and poverty are not synonymous Why economists consider individuals wants but not their needs Needs are not objectively definable Wants are things on which we place a positive value Slide 2-51 Slide 2-52

14 Summary Discussion of Learning Objectives 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 There is a trade-off between consumption goods and capital goods As more resources are devoted to the production of capital goods, we can expect the rate of economic growth to increase. Slide 2-53 Slide 2-54 Summary Discussion of Learning Objectives Absolute versus comparative advantage 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. End of Chapter 2 and the World of Trade-Offs Slide 2-55