Scarcity and the World

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Chapter 2
Scarcity and the World of Trade-Offs
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Chapter 2 Objectives

• Scarce resources and unlimited wants
• Differentiate among types of resources
• Opportunity cost, define and apply
• Production possibilities, trade-offs and
  interpret a production possibilities curve (PPC)
  on a graph.
• Economic growth, opportunity costs, increasing
  relative costs and unemployment of resources on
  a PPC
• Real-world application of production
  possibilities concepts
• Absolute advantage vs. Comparative advantage

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Economic Resources

• Land
• Natural resources
• Entrepreneurial Ability Recognizes opportunity,
  organizes other resources

• Capital Manufactured resources, buildings
  equipment
• -Labor
• Human productive
• capacity

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Scarce Resources and Unlimited Wants

• Scarce available in only limited amounts
• Scarcity is NOT
• a shortage.
• the same thing as poverty.
• Needs vs wants

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Scarce Resources and Unlimited Wants

• The result of scarce resources and unlimited
  wants is that we cant have everything we want,
  and we need to make choices

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The Concept of Opportunity Cost

• The opportunity cost is not the sum of all
  forgone opportunities, but only the next best
  alternative to the one chosen
• Example Joshua has 2 hrs this evening and here
  are his options
• Watch a movie
• Study Economics
• Work
• Write letters
• Go to the school dance

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The concept of Opportunity Cost

• The order of Joshua preference
• Watch a movie Study Economics Work Write
  letters Go to School Dance
• If he chooses to watch a movie, the opportunity
  cost is to study Economics

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Production Possibilities Curve- PPC

• Depicts maximum amount of total production
  possible assuming
• All available resources are used at highest level
  of technology available
• Two goods are produced

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Production Possibilities Curve

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Economic Growth vs output growth

• Economic growth outward shift of a PPC
• Output growth movement from a production point
  to a point farther from the origin

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Opportunity Cost on the PPC

• Opportunity Cost is seen on a production
  possibility curve as the amount of one good that
  must be given up in order to produce more of the
  other.

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Why The PPC Has a Curved Shape?

• Because of the increasing opportunity costs
• Occurs when the opportunity cost of an additional
  unit of a good rises as more and more of the good
  is obtained.

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Unemployment of Resources

• depicted by producing inside the PPC.
• The economy is not using all of its potential
• Idle resources
• Technical inefficiency

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Trade-off Capital vs. Consumer Goods

Focus on capital production, more rapid growth
rate
Focus on consumer production, slower growth rate
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Absolute Vs Comparative Advantage

• Absolute Advantage
• Ability to produce more units of a good or
  service, given the quantity of inputs

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Absolute Vs Comparative Advantage

• Comparative Advantage
• The ability to produce a good or service at a
  lower opportunity cost
• Relative concept
• Trading partners gain from specializing in the
  production of goods for which they have a
  comparative advantage and trading for other goods