Contemporary Economics:
An Applications Approach
By Robert J. Carbaugh
1st Edition
Chapter 1:
Scarcity and Choice
Copyright ©2001, South-Western College Publishing
Scarcity and Opportunity Cost
Opportunity cost and choice
90
A
Number of compacts
80
70
Car wash
possibilities
B
60
50
C
40
30
D
20
10
E
0
0
10
20
30
40
50
60
70
80
Number of minivans
Carbaugh, Chap. 1
2
Opportunity Cost
Production possibilities curve
Computers
(mill.)
7
A
6
A
6
B
5
Attainable and
unattainable production
combinations
Computers
(mill.)
7
Possible combinations
of computers and VCRs
Production
possibilities curve
(PPC)
B
5
4
Production possibilities
curve (PPC)
F
4
Points along PPC
imply no unemployed
resources and efficient
production
C
3
2
1
unattainable
C
3
Foregone
output
2
E
1
inefficient
D
0
0
1
2
3
4
VCRs (millions)
Carbaugh, Chap. 1
D
0
5
6
7
0
1
2
3
4
5
6
7
VCRs (millions)
3
Opportunity Cost
Law of increasing opportunity cost
Computers
(mill.)
7
A
6
A bowed outward PPC
illustrates increasing
opportunity costs
B
5
4
C
3
2
1
D
0
0
1
2
3
4
5
6
7
VCRs (millions)
Carbaugh, Chap. 1
4
Changes in the PPC
Economic growth
Computers
(mill.)
8
7
E
6
Economic growth is
illustrated by an outward
shift in a nation’s PPC
F
5
4
3
G
C
2
PPC0
PPC1
1
0
0
1
2
3
4
5
6
7
8
9
VCRs (millions)
Carbaugh, Chap. 1
5
Economic Growth
Consumption trade-offs
Consumer
goods
(hamburgers)
United States
Next year’s production
possibilities
The US choice to
produce more
consumer goods
(point A) limits future
production growth
A
Consumer
goods
(hamburgers)
Japan
Next year’s production
possibilities
Japan’s choice to
favor capital goods
(point A) will shift
its future PPC
farther out
PPC0
PPC0
This year’s
production possibilities
PPC1
Capital Goods (machinery)
Carbaugh, Chap. 1
A
This year’s
production possibilities
PPC1
Capital Goods (machinery)
6
Economic Growth
Investment and consumption
Investment and consumption as a share of Gross
Domestic Product, 1998
Nation
Brazil
Canada
China
Germany
Japan
Mexico
Russia
Singapore
South Korea
Sweden
United Kingdom
United States
Investment as a
percentage of GDP
Consumption as a
percentage of GDP
19.6%
18.7
33.8
21.7
28.3
19.5
19.3
36.9
35.3
13.7
15.4
14.7
63.2%
58.8
47.5
56.9
60.6
65.2
51.2
40.6
56.5
53.1
64.3
67.7
Investment defined as gross fixed capital formation. Source: IMF
Carbaugh, Chap. 1
7
Economic Growth
Economic sanctions
Iraq
Machines
PPC0 (before sanctions)
A
PPC1
(after sanctions)
Oil (barrels)
Carbaugh, Chap. 1
8
Economic Systems
Fundamental economic questions
Scarcity
Answered by
Imposes
Type of economic system:
- Market economy
- Command economy
- Mixed economy
Fundamental economic questions:
- What to produce?
- How to produce?
- For whom to produce?
Carbaugh, Chap. 1
9
Economic Systems
Market economy: circular flow model
Resource markets
Land, labor,
capital and
entrepreneurship
Business firms
Rent, wages,
interest and
profits
Households
Consumption
expenditures
Goods and
services
Product markets
Carbaugh, Chap. 1
10
Economic Systems
Role of government in a mixed economy
Government interventions:
- minimum wage law
- collective bargaining legislation
- worker health & safety regulations
- anti-discrimination legislation
Government interventions:
- laws promoting
competition
- business taxes
and subsidies
- public utility regulation
Resource markets
Business firms
Households
Government interventions:
- household income taxes
- public welfare programs
- job retraining programs
Product markets
Government interventions:
- purchases of goods and services
- trade barriers protecting domestic firms and workers
- product safety laws protecting consumers
Carbaugh, Chap. 1
11