Macroeconomics
ECON 2301
Spring 2009
Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 2
Out-of-Class Quiz #1
Before class on Tuesday, Jan. 27:
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
Out-of-Class Quiz #2
 Watch - live or taped, or read a transcript of, President
Obama’s inaugural address. For transcript, you can go to:
http://news.yahoo.com/s/ap/20090120/ap_on_go_
pr_wh/inauguration_obama_text/print
 In the body of your email to Dr. Spencer, write a 50-100
word summary of his remarks about the economy – using
YOUR OWN WORDS.
 Send this email to me at marilyn.spencer@tamucc.edu,
before class starts, January 27.
4 points possible
Chapter 2: Scarcity & the World of Trade-offs
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)
 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
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)
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.
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.
Assignments to be completed
before class January 29:
Read Chapter 3 & also read
Problems 3-1 through 3-5, 3-7, 3-8,
3-10 & 3-15 on pp. 79-81.