Managing Scarce Resources [email protected]. Objectives To be able to describe The Economic Problem To understand the factors of production as economic.

Managing Scarce Resources

[email protected]

Objectives

• To be able to describe The Economic Problem

• To understand the factors of production as economic resources

• To be able to explain the concept of opportunity cost

What is Economics About?

• Wants and needs• Scarcity• Choice• Opportunity Cost

The worlds resources are scarce but human wants are infinite so choices have to be made about

What to produce

Who to produce it for

How to produce it

This is known as the Economic Problem

The science of Economics involves advising how best to use scarce resources to make goods and services to satisfy as many wants as possible

The Economic ProblemWhat goods and services should an economy produce? Should the emphasis be on agriculture, manufacturing or services? Should it be on sport and leisure or housing? How should goods and services be produced? Labour, land or capital intensive? Efficiency?Who should get the resources that the economy has produced? Even distribution, more for the rich? More for those who work hard?Free or planned economic systems?

• The Economic Problem thus the study of Economics would not exist if

• Resources were infinite • Human wants were limited

Conflicts of Interest

• If scarce resources are used in one way they cannot be used in another way

• Example building a road may satisfy people commuting to work, but using land for this purpose means it cannot be used in another way, for example as farmland. This does not satisfy the wants of farmers and nature lovers

Value Judgements

• Opinions of what is ‘good’, ‘bad’, ‘right’ or ‘wrong’

• Normative statementsEg. ‘The UK should join the single

currency’

• Words that indicate a value judgement….

• Statements that can be proved against facts are called positive statements

• Eg. ‘There are over 4 million people unemployed’ can be tested against fact

Task• Positive or Normative Statement?1. Prices are on average rising by 10% a year2. Wealth should be more equally distributed3. A tax on wealth would reduce differences in people’s

wealth4. Old age pensions ought to be increased5. An increase in pensions would cause an increase in

spending in the economy6. An increase in taxation on petrol will reduce the quantity

of petrol sold7. If wages were lower firms would employ more workers8. Using scarce resources involves an opportunity cost9. We should use fewer resources today so that we will have

some left for the future

Opportunity Cost

• Making choices involves going without something else

• Opportunity cost is the next best alternative forgone when an economic decision is made (learn definition and use)

• It is the true cost of a decision as it represents what has been sacrificed

Questions

• What is the opportunity cost of– You studying IB Economics– Buying an Economics textbook– Spending an hour doing your Economics

homework

More detail on the economic problem…

Free and Economic Goods

• Most products are economic or scarce goods as limited resources have been used to make them

• Free goods do not require scarce resources to make eg. Sunlight– Do not confuse with goods such as the NHS

where patients do not have to pay for treatment- scarce resources were needed to provide this service

The Economic Problem

Land

Labour

Capital

Enterprise

Finite resources

Infinite wants

ChoicesWhat, how, for whom?

Economic Resources

Land- All natural resources that can be

used to produce goods and services. (Incl. forests, fish, oil)

Labour- All human effort, physical and mental

used in the production of goods and services

Capital- Capital goods: man-made goods that are

used to produce other goods and services eg. Factories, offices, warehouses, railways etc.

Capital goods (also known as Producer goods) are distinct from Consumer goods

Note- in economics Capital is not shares, bank accounts etc (these are financial assets). Capital is physical assets

Enterprise- The entrepreneur takes risks and organises

the other economic resources

Issues with the factors of production

• What might affect a country’s choice in what to produce?

-Land-Labour-Capital-Enterprise

Note

• Economists have to assume consumers act rationally hence that consumers spend their scarce resources in a way that will maximise the benefit (utility) that they gain from their expenditure

• Consumers are considered to be utility maximisers

Production Possibility Curves

• Analytical tools to show the concepts of scarcity, choice and opportunity cost

• Show the maximum output of a combination of two types of product that can be produced with current resources and technology

• Production Possibility Frontiers, Opportunity Cost Curve (PPCs, PPFs)

D and E are unattainableB and C are attainable but means there is unemployment or underemployment of some resources (inefficiencies)

Cap

ital G

ood

s

Consumer Goods

PPC1

A

B

C

E

D

Scarcity of economic resources limits output to points on or below the PPC

When an economy is producing on its PPC it is working to it’s full capacity and making full use of it’s economic resources.

Such a point is described as productively efficient

Economy ZC

ap

ital G

ood

s (K

) m

illio

ns

of

tonn

es

Consumer Goods (C) (millions of tonnes)

10

30

70

PPC1

10 5030

50

0

A

Point A= 30m K, 50m CMove to B to gain 10m C ‘costs’ 30m KThus the opportunity cost of 1m tonnes of consumer goods is 3m tonnes of capital goods

B

Cap

ital G

ood

s

Consumer Goods

Economy ZAt point A Economy Z can produce x1 of Consumer goods and y1 of Capital goods

y1

y2

x1x2

A

B

PPC1

To increase output of capital goods from y1 to y2, x1-x2 of consumer goods must be sacrificed

Hence PPCs can be used to demonstrate opportunity cost

Cap

ital G

ood

s

Consumer Goods

y1

x1 x2

Shifts in PPCs

PPC2

PPC1

A B

Over time most countries’ productive capacity increases- quantity and quality of resources increases, better educated and trained workforce and the quantity of capital goods increases

Cap

ital G

ood

s

Consumer Goods

PPC2

PPC1

AB

Actual and Potential Economic Growth

C

A to B and A to C are Actual Economic growth (an increase in output)

PPC1 to PPC2 represent potential economic growth (an increase in a country’s potential capacity)

In the UK in 2001 the cull of cows, sheep and pigs to fight the outbreak of foot and mouth disease reduced the country’s ability to produce agricultural products

If there is a change in the quantity or quality of resources that are specific to the production of one type of product, the slope of the PPC will change

Agricultural Products

Man

ufa

ctu

red

Good

s

PPC1

PPC2

Quick Quiz Tues 18th Sept

1. What is the ‘economic problem’ (3 marks)

2. What is meant by a ‘normative statement’? Give an example (2 marks)

3. What are the 4 factors of production? Give an example of each (8 marks)

4. Define opportunity cost (2 marks)

More on PPCs…

Notes on PPCs

• Most PPCs curve outwards from the origin• This shows that as more of one product is

produced, the opportunity cost of extra units of it increases (diminishing returns)

• This is because some resources are better suited to making one type of good

• In a few cases where economic resources are equally good at producing both types of products, the opportunity cost will be constant, hence the PPC will be a straight downward sloping line

Economy ZC

ap

ital G

ood

s

Consumer Goods (millions)

10

30

70

PPC1

10 5030

50

0

A

Point A= 30m K, 50m CMove to B to gain 10m C ‘costs’ 30m K

At point C however, to gain 10m C we only have to sacrifice 1m K

Thus the opportunity cost changes along the curve

B

C

• Handout• The shape of the PPC