Lesson 2 ppt

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-1
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• Answer the even numbered questions for
Appendix 1
• Question 2, 4, 6, 8

A-2
• a. direct
• b. inverse
• c. direct

A-4.
• a. direct (or positive); each 1-unit rise in x
induces a 5-unit increase in y.
• b. inverse (or negative); each 1-unit rise in
x induces a 2-unit decrease in y.
• c. direct (or positive); each 1-unit rise in x
induces a 1-unit increase in y. d. inverse (or
negative); each 1-unit rise in x induces a 3-
unit decline in y.

A-6.
y x
16 -4
12 -2
8 0
4 2
0 4

A-8.
• Each 1-unit increase in x yields a 2-unit
decrease in y, so the slope given by the
change in y corresponding to the change in
x is equal to −2.

Chapter 2
Scarcity and
the World of
Trade-Offs

Introduction
Suppose that you are a passenger on an airline flight, and
the captain announces an early arrival at your
destination. Immediately, you begin to contemplate how
you might use that extra hour.
But soon enough, you hear the bad news: There are no
empty gates, and you will have to wait at least an hour to
exit the plane. As you abandon your plans for that extra
hour, you realize that you have incurred an opportunity
cost.
In this chapter, you will learn how opportunity costs
affect economic decisions.

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

Learning Objectives (cont'd)
• Discuss why obtaining increasing
increments of any particular good entails
giving up more and more units of other
goods
• Explain why society faces a trade-off
between consumption goods and capital
goods
• Distinguish between absolute and
comparative advantage

Chapter Outline
• Scarcity
• Wants and Needs
• Scarcity, Choice, and Opportunity Cost
• The World of Trade-Offs
• The Choices Society Faces
• Economic Growth and the Production
Possibilities Curve

Chapter Outline (cont'd)
• The Trade-Off Between the Present and the
Future
• Specialization and Greater Productivity
• Comparative Advantage and Trade Among
Nations

Did You Know That …
• A recent report by the U.S. Department of
Commerce indicates that 11 percent of
consumer spending is devoted to “non-
essential items”?
– Some commentators responded by arguing that
Americans are wasting money on items they
don’t really need.
– Economists would say that individual economic
choices are based on wants rather than needs.

Scarcity
• Scarcity
– Is the most basic concept in all of economics
– Occurs when the ingredients for producing
things that people desire are insufficient to
satisfy all wants
– Means we never have enough of everything,
including time, to satisfy our every desire

Scarcity (cont'd)
• What scarcity is NOT
– It is not a shortage
– It is not the same thing as poverty

Scarcity (cont'd)
• 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

Scarcity (cont'd)
– Land
• Natural resources or the gifts of nature
– Labor
• The human resource

International Policy Example: A Lower Productive
Contribution of Sweltering Japanese Labor
• In order to reduce carbon dioxide
emissions, offices in Japan are using far less
air conditioning than they have in the past.
• The new office norm is now 82 degrees
during summer months.
• As a result, the productivity of Japanese
workers now declines in the summer.

Scarcity (cont'd)
– Physical Capital
• All manufactured resources
– Human Capital
• Accumulated training and education of workers

Scarcity (cont'd)
– Entrepreneurship
• Person who organizes, manages, and assembles the
other resources
• Risk taker
• Maker of basic business policy decisions

Scarcity (cont'd)
• Goods versus Economic Goods
– Goods are all things from which individuals
derive satisfaction or happiness.
– Economic goods are scarce goods, for which the
quantity demanded exceeds the quantity
supplied at zero price.

Scarcity (cont'd)
• Services
– Tasks that are performed for someone else
– Can be referred to as intangible goods

Scarcity (cont'd)
• Recall
– Scarcity occurs when the ingredients (resources)
for producing things that people desire are
insufficient to satisfy all wants.

Wants and Needs
• Needs
– To economists, the term need is not definable.
• Wants
– Goods and services on which we place a positive
value
– People have unlimited wants.

Scarcity, Choice, and Opportunity
Cost
• Opportunity Cost
– The highest-valued, next-best alternative that
must be sacrificed to obtain something or to
satisfy a want
– The next-highest-ranked alternative, not all
alternatives

Scarcity, Choice,
and Opportunity Cost (cont'd)
• Questions
– What is the opportunity cost of attending this
economics class?
– What is the opportunity cost of attending a
concert by your favorite band?
– What is the opportunity cost of working out at
the gym?

Scarcity, Choice,
and Opportunity Cost (cont'd)
• In economics, cost is always a forgone
opportunity.

Example: The Opportunity Cost of
17 Minutes of Labor in the U.S.
• During the economic downturn between
2007 and 2009, the length of the average
workday decreased by 17 minutes.
– The U.S. Labor Department determined that the
average amount of time spent in watching TV
rose by 12 minutes; the average amount of time
spent sleeping rose by 5 minutes.
– We can conclude that those additional 17
minutes of work in earlier years had imposed an
opportunity cost of time spent TV viewing and
sleeping.

The World of Trade-Offs
• Whenever you engage in any activity, using
any resource, you are trading off the use of
that resource for one or more alternative
uses
• The value of the trade-off is represented by
the opportunity cost, (that which you give
up to obtain something else)

The World of Trade-Offs (cont'd)
• Graphical analysis of opportunity cost
– The production possibilities curve (PPC)
represents all possible combinations of
maximum outputs that could be produced
assuming a fixed amount of productive
resources of a given quality

Figure 2-1 Production Possibilities Curve for
Grades in Mathematics and Economics (Trade-Offs)

The World of Trade-Offs (cont'd)
• The Production Possibilities Curve (PPC)
– Trade-offs: What would happen if you are more
interested in getting a higher grade in
economics?
– Holding constant total study time: What would
happen to the PPC if you spent more time
studying?
– Straight-line PPC: Is it possible that the terms of
the trade-off might not be constant?

The Choices Society Faces
• PPC is used to demonstrate related
concepts of scarcity, choice, and trade-offs
– At the individual level
– At the societal level

Figure 2-2: Society’s Trade-Off Between Tablet
Devices and Smartphones, Panel (a)

Figure 2-2: Society’s Trade-Off Between Tablet
Devices and Smartphones, Panel (b)

International Example: In China, More Factories
Mean Fewer Roads – And More Traffic
• Recently, a 62-mile section of highway in China
became ensnarled in a traffic jam that took public
safety officers nearly two weeks to break up.
• Traffic experts agree that this stretch of highway is
overburdened with more traffic than it was
designed to handle.
• China has allocated resources away from road
construction in favor of building new manufacturing
facilities.
• So, China is producing more manufacturing output
at the opportunity cost of better roads.

The Choices Society Faces (cont'd)
• Production possibilities assumptions
– Resources are fully employed
– Production takes place over 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

What If … we try to increase output by
diverting resources to “green” products?
• Some government officials suggest that, if more
resources are used to produce environmentally-
safe products, overall production will increase.
• But, with a fixed amount of resources and a given
level of technology, production of other goods and
services can only decrease if the output of “green”
products is expanded.

• Efficiency
– Productive efficiency is producing the maximum
output with given technology and resources
– Alternatively, the situation in which a given
output is produced at minimum cost

• Inefficient Point
– Any point below the production possibilities
curve at which the use of resources is not
generating the maximum possible output
• Law of Increasing Additional Cost
– As society attempts to produce more of a good,
the opportunity cost of additional units of that
good generally increases
– Accounts for bowed shape of the PPC

Figure 2-3 The Law of Increasing
Additional Cost

• Resources are not perfectly adaptable for
alternative uses
• In general, the more specialized the
resources, the more bowed the production
possibilities curve

Economic Growth and the Production
Possibilities Curve
• Economic growth
– Increases the production possibilities of smart
phones and tablet devices
– Over time, it is possible to have more of
everything
– Illustrated by an outward shift of the production
possibilities curve

Figure 2-4: Economic Growth Allows for
More of Everything

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

Consumption Goods and Capital
Goods: A Trade-Off
• Consumer goods
– Goods produced for personal satisfaction
• Capital goods
– Goods used to produce other goods

Figure 2-5 Capital Goods and Growth,
Panel (a)

Figure 2-5 Capital Goods and Growth,
Panel (b)

The Trade-Off Between the Present and
the Future (cont’d)
• Capital Goods and Growth: Observations
– Forgo consumption goods to produce capital
goods
– Increase in capital goods stimulates economic
growth

The Trade-Off Between the Present and
the Future (cont’d)
• Observations
– An increase in capital goods at present will lead
to a higher rate of economic growth in the future
– In the future, the economic system can produce
more consumer goods

Specialization and
Greater Productivity
• Specialization
– Organization of economic activity among
different individuals and regions
– Leads to greater productivity

Specialization and
Greater Productivity (cont'd)
• Comparative Advantage
– The ability to produce a good or service at a
lower opportunity cost
– Is always a relative concept

Example: A Comparative Advantage
in Watching Gift-Card Balances
• Some individuals pay others to keep track
of their gift-card balances.
• A firm called Tango Card uses software to
monitor gift-card balances and provide
periodic reports to consumers.
• Tango Card customers can save the time
they would otherwise have devoted to this
activity.

Specialization and
• Absolute Advantage
– The ability to produce more units of a good or
service using a given quantity of labor or
resource inputs
– Equivalently, the ability to produce the same
quantity of a good or service using fewer units of
labor or resource inputs

Specialization and
• Rational individuals choose their
comparative advantage and then specialize
• Specialization leads to division of labor
• Adam Smith, in The Wealth of Nations,
illustrated division of labor in pin making

Specialization and
• Division of Labor
– The segregation of resources into different
specific tasks
– For example, in automobile production, one
worker puts on bumpers, another work puts on
doors, and so on

Comparative Advantage
and Trade Among Nations
• Analysis of absolute advantage,
comparative advantage, and specialization
is applicable to individuals, groups of
people, or nations
• As a result, interstate trade occurs in the
United States and international trade occurs
between nations

Comparative Advantage
and Trade Among Nations (cont’d)
• When nations specialize where they have a
comparative advantage and then trade with
the rest of the world
– As economic efficiency improves
• Output increases
• Average standard of living rises

You Are There …The Opportunity Cost of
Vacation Time in South Korea
• The Korea Tourist Organization (KTO) serves
to develop and promote vacation tours
within the country.
• Employees of the KTO allocate fewer days to
vacations each year than does the average
South Korean.
• This can be explained by the fact that
employees are rewarded with extra pay for
unused vacation days.

Issues & Applications: The Rising
Opportunity Cost of Airlines’ Block Times
• Airlines are lengthening the block times
published on their flight schedules.
• Additional buffer times have been added,
especially for longer flights.

Figure 2-6: Block-Time Buffers During One
Month of U. S. Commercial Air Flights

Issues & Applications: The Rising Opportunity
Cost of Airlines’ Block Times (cont’d)
• Airlines have included additional minutes of
block time as a means of having more
flights classified as “on time”.
– If flight times have actually increased, then
there is an opportunity cost for all travelers.
– This opportunity cost is the time that could have
been devoted to other activities.

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 things on which we place a positive
value

Summary Discussion
of Learning Objectives (cont'd)
• 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

Summary Discussion
• 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

Summary Discussion
• 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

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