Transcript Document

A Lecture Presentation
in PowerPoint
to accompany
Exploring Economics
Second Edition
by Robert L. Sexton
Copyright © 2002 Thomson Learning, Inc.
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Printed in the United States of America
ISBN 0030342333
Copyright © 2002 by Thomson Learning, Inc.
Chapter 3
Scarcity, Trade-Offs and
Economic Growth
Copyright © 2002 by Thomson Learning, Inc.
3.1 The Three Economic Questions
Every Society Faces

Because of scarcity, certain economic
questions must be answered regardless
of the level of affluence of the society or
its political structure.
Copyright © 2002 by Thomson Learning, Inc.
3.1 The Three Economic Questions
Every Society Faces

Three fundamental questions that
inevitably must be faced in a world of
scarcity are:



What is to be produced?
How are these goods to be produced?
For whom are the goods produced?
Copyright © 2002 by Thomson Learning, Inc.
3.1 The Three Economic Questions
Every Society Faces


In market-oriented economies, people
“vote” on economic affairs with their
dollars.
Consumer sovereignty describes how
individual consumers in market
economies determine what and how
much is to be produced.
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3.1 The Three Economic Questions
Every Society Faces

Economies are organized in different
ways to answer the question of what is
to be produced.
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3.1 The Three Economic Questions
Every Society Faces


Command economies rely on central
planning; decisions about what and how
many are largely determined by a
government official associated with the
central planning organization.
Note that decisions are not made by
“organizations” but rather by individuals
within them; the incentives those
individuals face will impact decisions
regardless of the economic system.
Copyright © 2002 by Thomson Learning, Inc.
3.1 The Three Economic Questions
Every Society Faces

Market economies, on the other hand,
largely rely on a decentralized decisionmaking process, in which literally
millions of individual producers and
consumers of goods and services
determine what goods, and how many
of them, will be produced.
Copyright © 2002 by Thomson Learning, Inc.
3.1 The Three Economic Questions
Every Society Faces

Most countries, including the United
States, have mixed economies in which
the government and private sector
determine the allocation of resources
together.
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Exhibit 1: Government Spending as a
Percentage of GDP
70
60
50
40
30
20
10
0
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3.1 The Three Economic Questions
Every Society Faces

All economies, regardless of political
structure, must decide how to produce
the goods and services that they want.



For example, when digging a ditch, a
contractor must decide between many
workers using their hands, a few workers
with shovels, or one person with a
backhoe.
A decision must be made as to which
method is appropriate.
The best method = least-cost method.
Copyright © 2002 by Thomson Learning, Inc.
3.1 The Three Economic Questions
Every Society Faces

The best or "optimal" form of production
will vary from one economy to the next.

The production processes is used that
conserves the relatively scarce (thus
relatively more expensive) resources and
uses more of the relatively abundant
resources.
Labor-intensive methods will be used where
capital is relatively scarce
 Capital-intensive methods will be used where
labor is relatively scarce.

Copyright © 2002 by Thomson Learning, Inc.
3.1 The Three Economic Questions
Every Society Faces

In every society, some mechanism must
exist to determine how goods and
services are to be distributed among the
population.


Who gets what?
The distribution of income is an issue that
always arouses strong emotional
responses.
Copyright © 2002 by Thomson Learning, Inc.
3.1 The Three Economic Questions
Every Society Faces

In a market economy, with private
ownership and control of the means of
production, the amount of output one is
able to obtain depends on one's
income, which in turn, depends on the
quantity and quality of the scarce
resources that the individual controls.

Tiger Woods' income is very large because
his skills are very scarce.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve


The economic concepts of scarcity,
choice, and trade-offs can be illustrated
by the use of a production possibilities
curve, which represents the potential
total output combinations of any two
goods for an economy.
It illustrates an economy's potential for
allocating its limited resources for
producing various combinations of
goods, in a given time period.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve

The production possibilities curve
discussion begins with a straight-line
production possibilities curve, with the
goods being one's grade in economics
and one's grade in history.
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Expected Grade in Economics
Exhibit 1: Production Possibilities Curve:
“Producing” Grades in Economics and History
A 95
10 Hours Economics
0 Hours History
7.5 Hours Economics
2.5 Hours History
B 85
5 Hours Economics
5 Hours History
C 75
2.5 Hours Economics
7.5 Hours History
D 65
F 55
55
F
0 Hours Economics
10 Hours History
65
75
85
95
D
C
B
A
Expected Grade in History
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3.2 The Production Possibilities
Curve

On a production possibilities curve, we
assume that the economy has a given
quantity and quality of resources and
technology available to use for
production.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve


Using an example involving food and
shelter we can see a nonlinear
production possibilities curve.
Each point represents the potential
amounts of food and shelter that can be
produced in a given time period, given
the quantity and quality of resources
available.
Copyright © 2002 by Thomson Learning, Inc.
Shelter (units)
Exhibit 2: Production Possibilities Curve: The
Trade-Off Between Shelter and Food
10 A
9
8
7
6
5
4
3
2
1
0
B
N
(Not Attainable)
C
I
(Inefficient)
20
All the points on the
production
possibilities curve
are efficient.
D
40
60
Food (units)
E
80
Any points in the
shaded area are
inefficient.
Any point outside the production possibilities curve
is not attainable at the present time.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve


The economy cannot produce beyond
the levels indicated by the production
possibilities curve during a given time
period, because there are not enough
resources to produce that output.
However, it is possible to operate inside
the production possibilities curve.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve



If an economy is operating inside its
production possibilities curve, it is not at
full capacity and is operating
inefficiently.
The economy is not getting the most it
can from its scarce resources.
As a result, actual output is less than
potential output.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve


Most modern economies have
resources that are idle, at least for some
period of time.
If those resources were not idle, people
would have more scarce goods and
services available for their use.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve


Unemployed resources create a serious
problem, not just for labor but for all
resources entering into production, such
as plant capacity.
All resources must be used effectively
for efficient production.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve

Social concern about unemployed
resources focuses on labor.


First, labor costs are the largest share of
production costs.
Second, unemployed or underemployed
laborers (whose resources are not being
used to their full potential) may have
mouths to feed at home, while an
unemployed machine does not (although
the owner of the unemployed machine
may).
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve


Underutilized resources or those not
being put to their best uses are
illustrated by output combinations inside
the production possibilities curve.
By putting unemployed resources to
work or by putting already employed
resources to better uses, we could
expand output.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve


Increasing or improving the utilization of
resources can lead to greater output of
all goods.
That is why we all have an interest in
the efficient use of all of society's
resources:

There can be more of everything we care
about available for our use.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve


Efficiency requires society to use its
resources to the fullest extent—getting
the most we can out of our scarce
resources.
If resources are being used efficiently,
at a point along a production
possibilities curve, more of one good or
service requires the sacrifice of another
good or service as its cost.
Copyright © 2002 by Thomson Learning, Inc.
3.2 The Production Possibilities
Curve


The production possibilities curve is not
a straight line.
It is concave from below (that is, bowed
outward from the origin), reflecting
increasing opportunity costs of
producing additional amounts of a good.
Copyright © 2002 by Thomson Learning, Inc.
Shelter (unit)
Exhibit 3: Increasing Opportunity Cost and the
Production Possibilities Curve
10
9
8
7
6
5
4
3
2
1
A
Opportunity cost in forgone shelter
(1) to obtain 20 additional food
0
Copyright © 2002 by Thomson Learning, Inc.
B
Opportunity cost in forgone shelter
(2) to obtain 20 additional food
C
Opportunity cost in
forgone shelter (3) to
obtain 20 additional
food
D
Opportunity cost in
forgone shelter (4) to
obtain 20 additional
food
E
20
40
60
Food (units)
80
3.2 The Production Possibilities
Curve


The basic reason for increasing
opportunity cost is that some resources
and skills cannot be easily adapted from
their current uses to alternative uses.
Easily adaptable resources are soon
exhausted and resources and workers
that are less well-suited or appropriate
(those with a relatively greater
opportunity cost) must then be
employed to increase output further.
Copyright © 2002 by Thomson Learning, Inc.
Exhibit 4: Opportunity Costs
for Cattle and Wheat
Quantity of Cattle
A
B
50
C
45
Opportunity cost
40
D
in forgone cattle
35
(25) to obtain 10
30
E additional
25
bushels of wheat
20
15
10
F
5
0 5 10 15 20 25 30 35 40 45 50
Quantity of Wheat (bushels)
Copyright © 2002 by Thomson Learning, Inc.
3.3 Economic Growth and the
Production Possibilities Curve


Some nations have been able to rapidly
expand their output of goods and
services over time.
Others have been unable to increase
their standard of living at all.
Copyright © 2002 by Thomson Learning, Inc.
3.3 Economic Growth and the
Production Possibilities Curve


To generate economic growth, a society
must produce fewer consumer goods
and more capital goods in the present.
They must sacrifice some consumption
of consumer goods in the present in
order to experience growth in the future.
Copyright © 2002 by Thomson Learning, Inc.
3.3 Economic Growth and the
Production Possibilities Curve


Investing in capital goods will increase
the future production capacity of the
economy.
So an economy that invests more and
consumes less now will be able to
produce and consume more in the
future.
Copyright © 2002 by Thomson Learning, Inc.
3.3 Economic Growth and the
Production Possibilities Curve


An economy can only grow with
qualitative or quantitative changes in the
factors of production—land, labor,
capital, and entrepreneurship.
outward shifts of the production
possibilities curve result from



advancements in technology,
improvements in labor productivity, or
new natural resource finds.
Copyright © 2002 by Thomson Learning, Inc.
3.3 Economic Growth and the
Production Possibilities Curve


Economic growth means an outward
shift in the “menu” of possible bundles
of output illustrated by the production
possibilities curve.
With growth comes the possibility to
have more of both goods than were
previously available.
Copyright © 2002 by Thomson Learning, Inc.
Shelter (unit)
Exhibit 1: Economic Growth
and Production Possibilities
18
16
14
12
A
10
B
9
8
C
7
6
Old
5
production
4
3 possibilties
2 curve
New
production
possibilties
curve
F (FUTURE)
D
1
0
E
20
40
60
80
Food (units)
Copyright © 2002 by Thomson Learning, Inc.
100
120
3.3 Economic Growth and the
Production Possibilities Curve



It is important to remember that
increases in a society's output do not
make scarcity disappear.
Even when output has grown more
rapidly than population, so people are
made better off, they still face trade-offs.
At any point along the production
possibilities curve, in order to get more
of one thing, you must give up
something else.
Copyright © 2002 by Thomson Learning, Inc.
3.3 Economic Growth and the
Production Possibilities Curve


An economy that invests more of its
resources for the future devotes a larger
share of its productive capacity to
capital goods rather than consumption
goods.
Economies that choose to invest more
of their resources for the future will grow
faster than those that don't, other things
equal.
Copyright © 2002 by Thomson Learning, Inc.
Exhibit 2: Economic Growth
and the Production Possibilities Curve
Capital Goods (K)
Economy (A)
2012
KA
2002
CA
Consumer Goods (C)
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Exhibit 2: Economic Growth
and the Production Possibilities Curve
Capital Goods (K)
Economy (B)
2012
2002
KB
CB
Consumer Goods (C)
Copyright © 2002 by Thomson Learning, Inc.
3.3 Economic Growth and the
Production Possibilities Curve

The production possibilities curve can
be used to illustrate the economic
concepts of scarcity, choice, opportunity
costs, efficiency, and economic growth.

Scarcity is represented by the fact that
resource combinations outside the
production possibility curve are
unattainable.
Copyright © 2002 by Thomson Learning, Inc.
3.3 Economic Growth and the
Production Possibilities Curve


Choice is the fact that one must choose
among the alternative bundles available
along the production possibilities curve.
Opportunity costs are how much of one
good you give up to get another unit of the
second good as you move along the
production possibilities curve.
Copyright © 2002 by Thomson Learning, Inc.
3.3 Economic Growth and the
Production Possibilities Curve


Efficiency would mean being on the
production possibilities curve rather than
inside it.
Economic growth is represented by shifting
out the production possibilities curve.
Copyright © 2002 by Thomson Learning, Inc.
Quantity of Military Goods
Exhibit 3: Production Possibilities Curve
Economic
growth
D
C
B
A
0
Quantity of Consumer Goods
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Average Annual per Capita Real GDP
Growth Rate (1970–90)
Exhibit 4: Correlation
of Investment and Growth
4.0
Irelan
d
3.5
3.0
2.5
2.0
1.5
Japa
n
Icelan
d
Portugal
Finlan
d
Austria
Norwa
y
Turke
Canad Italy
y
Belgium
Spai
a Greec
n
United
German
e
Luxembourg
Kingdom
y
Franc
Australi
e
Denmark
Netherlands a
Sweden
United
Switzerlan
States
New Zealand
d
1.0
0.5
0.0
16
18
20
22
24
26
28
Investment as Share of GDP (average, 1970-1990)
Copyright © 2002 by Thomson Learning, Inc.
30
32