The Economic Problem: Scarcity and Choice

Chapter 2

Prepared by: Fernando & Yvonn Quijano

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair CHAPTER 2: The Economic Problem: Scarcity and Choice © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair The Economic Problem: Scarcity and Choice

Looking Ahead Mixed Systems, Markets, Laissez Command Economies Economic Systems The Economic Problem Comparative Advantage The Production Possibility Frontier Scarcity and Choice in an Scarcity and Choice in a Scarcity, and Choice, The The Market Free and and Governments and the Gains from Trade Economy of Two or More One Cost Opportunity Chapter OutlineChapter - Person Person Economy - Faire Economies: 2

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY CHOICE AND PROBLEM:THE ECONOMIC © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair order to understand an economic system: order to an economicunderstand must inThree questionsbe answeredbasic • • • Who gets whatis produced? How isitproduced? What gets produced? FIGURE 2.1 The Three Basic Questions

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY CHOICE AND PROBLEM:THE ECONOMIC © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair Anotherfor wordresources. inputs intothe process ofproduction. factors of production (or factors) services. of otherproductionand goods producedand thatare then usedin the capital

Things thatare themselves

The

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY CHOICE AND PROBLEM:THE ECONOMIC © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair outputs satisfy wants. human to can directly orindirectly be used by naturethat orpreviousgenerations inputs services. goods and transforms scarce resources into useful production or

Usable products.Usable resources resources

The process that

Anything provided Anything

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST ONE SCARCITY CHOICE AND IN A © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair economy. must made inasimple also be that economies characterize complex decisionsthe same basic Nearly all - PERSON ECONOMY

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST Opportunity Cost © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair discipline of economics.discipline and The concepts of a or decision.choice that up, we weor forgo, make give when opportunity costs

scarcity

are central to are central the

constrained choiceconstrained

The bestalternative

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST ECONOMY OF TWO OR MORE SCARCITY CHOICE AND IN AN © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair an cost. opportunity spent thein classroomhas Education takes time. Time

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST Advantage Specialization, Exchange,and Comparative © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair efficient producers. even those that may more be absolutely parties, free tradingbenefit all trade will Ricardo’sand theory thatspecialization theoryof advantage comparative

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair lower opportunity cost. lower opportunity service if it canthat product produce at a of aanother goodthe or inproduction over advantagehas a comparative comparative advantage resources. produce fewer that productusing of aproduction goodor serviceifitcan absoluteover advantageanotherthe in absolute advantage

Aan has producer

A producer

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST and Benefits Weighing andPresent Expected FutureCosts © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair benefits in small waysthe time. benefitssmall all in We trade off present andfuture

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST present consumption. Because resources are scarce, the opportunitycost of everyinvestment in capital is forgone Capital Goods andGoods Consumer © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair resources to produce new capital.resources to new produce investment present consumption. consumer goods

Theof process using

Goods produced for Goods produced

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST THE PRODUCTIONPOSSIBILITY FRONTIER © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair used efficiently. producedif allof society’sare resources services thatcanbe goods and of graph that the combinationsallshows production possibility frontier (ppf)

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST Unemployment © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair are not producing all that allcan. are wenot producing unemploymentof laborand capital,we than their total capacity.When thereis run plantsat lessrecessions, industrial or downturnseconomicDuring

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST The Efficient Mix of Output Inefficiency © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair whatwant. people To be efficient, must aneconomy produce private firms. mismanagement ofindividual mismanagementof the economyof instead Sometimes, results from inefficiency its potential.belowa firm’s operating Waste andare the mismanagementresults of

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST FIGURE 2.4 Negative Slope and Opportunity Cost © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair of Land in Farming Inefficiency from Misallocation

possibility frontier (ppf). possibility The slopeof theproduction transformation (MRT) marginal rate of

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST TABLE 2.1 POINT POINT PPF ON D C E B A

The Law of Increasing Opportunity Cost © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair BUSHELS PER (MILLIONS OF (MILLIONS PRODUCTION Production Possibility Schedule Schedule Possibility Production Production in Ohio and Kansas and Ohio in Production for Total Wheat Corn and TOTAL YEAR) CORN 300 400 510 650 700

BUSHELS PER (MILLIONS OF (MILLIONS PRODUCTION WHEAT TOTAL YEAR) 550 500 380 200 100

FIGURE 2.5

Ohio and Kansas Corn and Wheat Production in

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST Economic Growth © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair existingresources. or it learnsto whenproduce moreusing resources new when asocietyacquires total anoutput of economy. It occurs economic growth

An increase in the inAn increase

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST 1998 1990 1985 1981 1975 1965 1955 1945 1935 TABLE 2.2 2006 2001 – – – – – – – – © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair 1995 1990 1985 1979 1969 1959 1949 1939

1935 Increasing Productivityin Cornand Wheat Production in the United States, Yield Per Acre (Bushels) – 2006 145.6 138.2 134.4 120.6 107.2 112.8 36.1 26.1 96.3 78.5 48.7

CORN Labor Hours Per 100 Bushels

NA NA NA NA NA 108 20 53 3 4 7 a a a a a

Yield Per Acre (Bushels) 42.3 43.5 43.2 38.1 38.0 36.9 31.3 27.5 22.3 16.9 13.2

WHEAT Per Per 100 Bushels

Labor Hours

NA NA NA NA NA 17 34 67 11 7 9 a a a a a

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST Poor Countries Sources ofGrowth and the Dilemmathe of © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair FIGURE 2.7 Capital Goods and Growth in Poor and Rich Countries

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST GAINS FROM TRADE COMPARATIVE ADVANTAGE THEAND © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair FIGURE 2.8 Production Possibility Frontiers with NoTrade

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST growth, growth, and the gains from trade. inefficiency, opportunitycost, the law of increasing opportunitycost, economic concepts that we shall use throughout the rest of this book: scarcity,unemployment, Although it exists onlyas an abstraction, the ppf illustrates a number of veryimportant © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair FIGURE 2.9

Colleen and Bill Gain from Trade

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CHAPTER 2: The Economic Problem: Scarcity and Choice SCARCITY,CHOICE, OPPORTUNITYAND COST THE ECONOMIC PROBLEM © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair questions? the three basiceconomicanswering do large,gosocieties complex about Given how exactlyscarce resources, systems: all economic facing Recallquestionsthe three basic (3) (3) Who gets it? (2) How isitproduced? (1) What gets produced?

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CHAPTER 2: The Economic Problem: Scarcity and Choice ECONOMIC SYSTEMSECONOMIC COMMAND ECONOMIES © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair incomes, prices.and sets output directly orindirectlytargets, government either a whichcentral command economy

Anin economy

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CHAPTER 2: The Economic Problem: Scarcity and Choice ECONOMIC SYSTEMSECONOMIC determines what gets produced, how it is produced, and who gets it. engaging in exchange. The behavior of buyersand sellers in a laissez Some markets are simple and others are complex, but they all involve buyersand sellers MARKET LAISSEZ © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair in exchange. buyers sellersandinteractand engage market regulation. or withoutany centraldirection selffirms pursue theirown and people individualeconomyin which the [them] French: “allowto do.” An laissez -

FAIRE ECONOMIES: FREETHE -

faire faire economy The institution through which through The institution

Literally from from Literally - interests

- faire economy

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CHAPTER 2: The Economic Problem: Scarcity and Choice ECONOMIC SYSTEMSECONOMIC Consumer Sovereignty © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair purchase). not whatto to(andwhat purchase not(or by choosingproduced produced) be dictate whatwillconsumers ultimately consumer sovereignty

Thethat idea

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CHAPTER 2: The Economic Problem: Scarcity and Choice ECONOMIC SYSTEMSECONOMIC Enterprise Individual Production Decisions: Free © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair businesses in search ofprofits. businessesin to start operateprivate individualsand free enterprise

The of freedom

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CHAPTER 2: The Economic Problem: Scarcity and Choice ECONOMIC SYSTEMSECONOMIC Distribution Distribution of Output © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair through saving or inheritance.through saving out of have accumulated past income Wealth like. forms: the interest, and wages,salaries, earns year.each It comes a numberin of Income andgets wealth.on itsincome depends The amount that oneany household

is theamount that households is the amount that is theamount a household

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CHAPTER 2: The Economic Problem: Scarcity and Choice ECONOMIC SYSTEMSECONOMIC In a free market system,the basic economic questions are answered without the help of mechanism is price. and whether to buy, sell, invest, or save the income that they earn. The basic coordinating that people want. Others will decide whether to acquire skills; whether to work; their own self the system is left to operate on its own, with no outside interference. Individuals pursuing a central government plan or directives. This is what the “free” in free market means Price Theory © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair - interest will go into business and produce the products and services

losses. profit opportunitiesand businessresponse in to dayandsomeoutof go Newbusinesseseacharise

—

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CHAPTER 2: The Economic Problem: Scarcity and Choice ECONOMIC SYSTEMSECONOMIC be left out. Third, periods of unemploymentand inflation recur with some regularity. inefficiencies. Second, rewards (income) maybe unfairly distributed, and some groups may perfect. First, theydo not always produce what people want at lowest cost Even staunch defenders of the free enterprise systemrecognize that market systems are not GOVERNMENTS MIXED SYSTEMS, MARKETS, AND © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair “mixed.” allsystems some sense real arein these pure forms do notexistthe inworld; their pure forms In fact, are enormous. laissezandeconomies The differencescommandbetween

- faire economies ineconomies faire — there are

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CHAPTER 2: The Economic Problem: Scarcity and Choice REVIEW TERMS CONCEPTSAND inputs or resources free enterprise factors of production (or economic growth consumer sovereignty consumer goods comparative advantage command economy capital absolute advantage © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair factors)

theory of comparative advantage production possibility frontier (ppf) production outputs opportunity cost market marginal rate of transformation laissez investments (MRT)

faire economy

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