Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 2

Chapter 2: Scarcity & the World of Trade-offs

2.
3.
1.
4.
5.
6.
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
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

 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:
 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.

 Production
(cont'd)

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

(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

(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 .

 Opportunity Cost

The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want

(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.

(cont'd)
Limited Resources & Unlimited Wants
Scarcity
Choices
Opportunity Cost

(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)

1.
By 5 p.m., Monday, January 24 :
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
.

 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?

 PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs

At the individual level

At the societal level

14 th 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)

15 th 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

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

(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.

 PPC can be used to illustrate the trade-off between present and future consumption
 Consumption

The use of goods and services for personal satisfaction

 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 (b)

Specialization and Gains from Trade
Trade The act of buying or selling.

Specialization and Gains from 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.
You
Your neighbor
Opportunity cost of picking 1 pound of apples
1 pound of cherries
2 pounds of cherries
Opportunity cost of picking
1 pound of cherries
1 pound of apples
.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.

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.

 Be prepared for an in-class quiz during our next class!
 It will consist of 4 multiple choice questions, from Chapter 2 & Chapter 3.

1.
By 5 p.m., Monday, January 24 :
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
.

 Pre-read Chapter 3 & also read these end-ofchapter problems:
 14 th ed: 3-1 through 3-5, 3-7, 3-8, 3-10 & 3-15 on pp.
79-81

15 th ed: 3-1 through 3-5, 3-7, 3-8, 3-13 & 3-14 on pp.
79-81
 Pre-read Chapter 4 & also read the following endof-chapter questions:

14 th edition: Problems 4-1, 4-3 through 4-8, and 4-11.
 15 th edition: Problems 4-2, 4-3, 4-4, 4-7, 4-9, 4-11 and
4-14.