Macroeconomics
ECON 2301
Fall 2009
Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 2
Out-of-Class Quiz #1
By 5 p.m., Thursday, September 3:
1. Create an Islander email account.
2. Email me so that I will have your email address.
Include your name and your course & section
numbers.
My email address is
marilyn.spencer@tamucc.edu.
4 points
Chapter 2: Scarcity & the World of Trade-offs
Learning Objectives:
1. Evaluate whether even affluent people face the problem
2.
3.
4.
5.
6.
of scarcity
Understand why economists consider wants but not needs
Explain why the scarcity problem induces individuals to
consider opportunity costs
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
 The Trade-Off Between the Present and the Future
 Specialization and Greater Productivity
 Comparative Advantage and Trade Among Nations
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
 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
Human Capital
• Accumulated training and education of workers
Physical Capital
• All manufactured resources
Entrepreneurship
• Person who organizes, manages, and assembles the other
resources
• Risk taker
• Maker of basic business policy decisions
Scarcity (cont'd)
 Economic Goods
Economic goods are scarce goods, for which the
quantity demanded exceeds the quantity supplied at
zero price.
 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
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?
 In economics, cost is always a forgone
opportunity.
Scarcity, Choice,
and Opportunity Cost (cont'd)
Limited Resources & Unlimited Wants
Scarcity
Choices
Opportunity Cost
The World of Trade-Offs (cont'd)
 Opportunity cost graphically
The production possibilities curve (PPC)
represents all possible maximum combinations
of total output that could
be produced.
Along the production possibilities curve, there
is a fixed quantity of productive resources of a
given quality being used efficiently.
Figure 2-1 PPC for Grades in
Mathematics & Economics (Trade-Offs)
Production
Possibilities Curve (PPC)
 Questions:
What would happen to the production
possibilities curve if you spent more time
studying?
What would happen to your potential grades?
Is it possible that 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
14th ed.: Figure 2-2 Society’s Trade-Off
Between Digital Cameras & Pocket PCs, Panel
(a)
Figure 2-2 Society’s Trade-Off Between
Digital Cameras and Pocket PCs, Panel (b)
15th ed.: Figure 2-2 Society’s Trade-Off Between Computer
Servers and HDTVs, Panel (a)
Figure 2-2 Society’s Trade-Off Between Computer
Servers and HDTVs, Panel (b)
nd
2
Extra Credit Opportunity
Expect a quiz at the beginning of
class, Wednesday, September 9.
The Choices Society Faces (cont'd)
 Production possibilities assumptions:
1.
Resources are fully employed
2.
Production takes place over a specific time period
3. Resources are fixed for the time period
4.
Technology does not change over the time period
The Choices Society Faces (cont'd)
 Efficiency
The case in which a given level of inputs is used to
produce the maximum output possible
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
Economic Growth and the PPC
 Economic growth
Increases the production possibilities
of digital cameras and pocket PCs
Occurs over a period of time
Is illustrated by an outward shift
of the production possibilities curve
Figure 2-4 Economic Growth Allows
for More of Everything
Refer to the graph below. What is the
opportunity cost of moving from pt. B to pt. C?




a. 200 SUVs.
b. 400 SUVs.
c. 200 roadsters.
d. 400 roadsters.
Production Possibilities Frontiers and
Real-world Trade-offs
Economic Growth
Economic Growth The ability of the economy to
produce increasing quantities of goods and services.
Refer to the graph below. Which graph best
represents the concept of economic growth?




a. The graph on the left.
b. The graph on the right.
c. Both graphs.
d. Neither graph.
The Trade-Off Between
the Present and the Future
 PPC can be used to illustrate the trade-off
between present and future consumption
 Consumption
The use of goods and services for personal
satisfaction
Figure 2-5 Capital Goods and
Growth
 Consumer goods: Goods
produced for personal
satisfaction
 Capital goods: Goods used to
produce other goods
You must forgo
consumption goods to
produce capital goods
The increase in capital
goods stimulates economic
growth
Figure 2-5 Capital Goods and
Growth, Panel (a)
Figure 2-5 Capital Goods and Growth, Panel (b)
Trade
Specialization and Gains from Trade
Trade The act of buying or selling.
Trade: Specialization and Gains
from Trade
Trade: Absolute Advantage vs.
Comparative Advantage
Absolute advantage The ability of an individual, firm, or
country to produce more of a good or service than competitors using
the same amount of resources.
Comparative advantage The ability of an individual, firm, or
country to produce a good or service at a lower opportunity cost than
other producers.
Opportunity cost of
picking 1 pound of apples
Opportunity cost of picking
1 pound of cherries
You
1 pound of cherries
1 pound of apples
Your neighbor
2 pounds of cherries
.5 pound of apples
Don’t Confuse Absolute Advantage and Comparative Advantage!!!
Refer to the graphs below. Each graph
represents one country. Which country has a
comparative advantage in the production of shirts?




a. Country A.
b. Country B.
c. Neither country.
d. Both countries.
Trade: Comparative Advantage & the Gains from
Trade
The basis for trade is comparative advantage, not
absolute advantage.
Individuals, firms, and countries are better off if they
specialize in producing goods and services for which
they have a comparative advantage and obtain the
other goods and services they need by trading.
Extra Credit Opportunity #3
1. Watch or read a transcript of Pres. Obama’s
televised Sept. 9 address on health care reform.
2. Before class starts, Wednesday, September
16: Email a 50-word summary of the economic
issues involved. My email address is
marilyn.spencer@tamucc.edu.
4 points possible
Assignments to be completed
before class September 14:
Read Chapter 3 & also read these
end-of-chapter problems:
14th ed: 3-1 through 3-5, 3-7, 3-8, 3-10 &
3-15 on pp. 79-81
15th ed: 3-1 through 3-5, 3-7, 3-8, 3-13 &
3-14 on pp. 79-81