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)

• Resources or Factors of Production

– 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.



• 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



• 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



• 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 Advantageand 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 Advantageand 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



• 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



• 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

Lesson 2 ppt

Education

production

choices society

rising opportunity

comparative

comparative

tablet devices

personal satisfaction

card balances