Transcript Scarcity - TeacherWeb

SCARCITY
Terms to Know and Apply
absolute advantage
capital
command economy
comparative advantage
consumer goods
consumer sovereignty
economic growth
economic problem
Investment
Productive resources:
natural resources
capital resource
human resource
(including human capital)
Economic decisions:
Scarcity
choice
costs and benefits
opportunity cost
marginal (added) cost
trade-offs
laissez-faire economy
opportunity cost
Market
Outputs
Price
Production
resources or inputs
three basic questions
Terms to Know and Apply
Goods and services:
producers
consumers
buyers
sellers
production
distribution
consumption
channels of distribution
marketing
The basic economic problem that arises because
people have unlimited wants but resources are limited.
Because of scarcity, various economic decisions must
be made to allocate resources efficiently.
When we talk of
scarcity within an
economic context,
it refers to limited
resources, not a
lack of riches.
These resources
are the inputs of
production: land,
labor and capital.
People must make choices between different items
because the resources necessary to fulfill their wants
are limited. These decisions are made by giving up
(trading off) one want to satisfy another.
There is only so much wheat grown every year.
Some people want bread; some people want cereal;
some people want beer, and so on. Only so much of
any one product can be made because of the scarcity of
wheat. How do we decide how much flour should be
made for bread?
Because of scarcity people have to make choices,
choices have costs and benefits
People are likely to make the choice
that has the most benefit to them,
with the least cost, or, put another
way, the choice that provides more
in benefits than it costs.
Scarcity requires choice. People must choose which of
their desires they will satisfy and which they will leave
unsatisfied.
When we, either as individuals or as a society, choose more
of something, scarcity forces us to take less of something else.
Economics is sometimes called the study of scarcity because
economic activity would not exist if scarcity did not force people
to make choices
If not for choice our economic system would not work.
What if we only had one car maker to choose from?
What if we only had one company that made bread?,
cereal?, soft drinks?
Scarcity, Choice, and Opportunity Cost
Human wants are unlimited, but resources are not.
Three basic questions must be answered in order to understand
an economic system:
What gets produced?
How is it produced?
Who gets what is produced?
Scarcity, Choice, and Opportunity Cost
•Every society has some system or mechanism that transforms
that society’s scarce resources into useful goods and services.
The basic resources that are available to a society
are factors of production:
Land
Labor
Capital
Capital refers to the things that are themselves
produced and then used to produce other goods
and services
Production is the process that transforms scarce
resources into useful goods and services.
Resources or factors of production are the inputs
into the process of production; goods and services
of value to households are the outputs of the
process of production.
Nearly all the basic decisions that characterize
complex economies must also be made in a
single-person economy.
Constrained choice and scarcity are the basic
concepts that apply to every society
Scarcity and Choice
in an Economy of Two or More
A producer has an absolute advantage over
another in the production of a good or service if it
can produce that product using fewer resources.
Daily Production
Colleen
Bill
Wood
(logs)
Food
(bushels)
10
4
10
8
•Colleen has an absolute advantage in the production of
both wood and food because she can produce more of both
goods using fewer resources than Bill.
Daily Production
Colleen
Bill

Food
(bushels)
10
4
10
8
In terms of wood:



Wood
(logs)
For Bill, the opportunity cost of 8 bushels of food is 4 logs.
For Colleen, the opportunity cost of 8 bushels of food is 8 logs.
In terms of food:
 For Colleen, the opportunity cost of 10 logs is 10 bushels of
food.

For Bill, the opportunity cost of 10 logs is 20 bushels of food.

Suppose that Colleen and Bill each wanted equal numbers of logs and
bushels of food. In a 30-day month they could produce
Daily Production
Wood
(logs)
Food
(bushels)
Colleen
10
10
Bill
4
8
Monthly Production
with No Trade
Wood
(logs)
Food
(bushels)
Colleen
150
150
Bill
80
80
Total
230
230
Monthly Production
after Specialization
Wood
(logs)
Food
(bushels)
Colleen
270
30
Bill
0
240
Total
270
270
By specializing on the
basis of comparative
advantage, Colleen
and Bill can produce
more of both goods.

To end up with equal amounts of wood and food after
trade, Colleen could trade 100 logs for 140 bushels of
food. Then:
Monthly Production
after Specialization
Wood
(logs)
Food
(bushels)
Colleen
270
30
Bill
0
240
Total
270
270
Monthly Use After
Trade
Wood
(logs)
Food
(bushels)
Colleen
170
170
Bill
100
100
Total
270
270

The economic problem: Given scarce
resources, how, do large, complex
societies go about answering the three
basic economic questions?

Economic systems are the basic arrangements
made by societies to solve the economic problem.
They include:
 Command economies
 Laissez-faire economies
 Mixed systems
In a command economy, a central government either
directly or indirectly sets output targets, incomes, and prices.
Economy planned and directed by government, where
resources are allocated to factories by the state through
central planning. This system is unresponsive to the needs
and whims of consumers and to sudden changes in conditions
(for example, crop failure or fluctuations in the world price of
raw materials).
For example, in the former USSR, state planners decided
what was to be produced. They passed orders down to
factories, allocating raw materials, workers, and other
factors of production to them. Factories were then told how
much they should produce with these resources and where
they should be sent. If there was a shortage of goods
in the shops, then goods would be rationed through
queuing.
In a laissez-faire economy, individuals and firms pursue
their own self-interests without any central direction or
regulation.
The central
institution of a
laissez-faire
economy is the freemarket system.
A market is the
institution through
which buyers and
sellers interact and
engage in exchange.

In a laissez-faire economy,
the distribution of output is
also determined in a
decentralized way. The
amount that any one
household gets depends on
its income and wealth.
 Consumer sovereignty is the idea that consumers
ultimately dictate what will be produced (or not produced)
by choosing what to purchase (and what not to purchase).
The theory of consumer sovereignty says that, while
businesses and companies can produce anything they
choose, if consumers do not want or need a product, it will
not sell. If a product is not sold, it will not continue to be
produced. Therefore, buyers ultimately decide what is
produced.
Free Enterprise is an economic system where few
restrictions are placed on business activities and
ownership. In this system, governments generally have
minimal ownership of enterprises in the market place.
This system aims for limited restrictions on trade and
minimal government intervention.

Under a free market system, individual producers must figure
out how to plan, organize, and coordinate the production of
products and services.

The basic coordinating mechanism in a free market system is
price. Price is the amount that a product sells for per unit. It
reflects what society is willing to pay.
In economics, price is determined
by what
(1) a buyer is willing to pay,
(2) a seller is willing to accept, and
(3) the competition is allowing to
be charged.
With product, promotion, and
place of marketing mix, it is one of
the business variables over which
organizations can exercise some
degree of control
Capitalism and Free
Enterprise are
interchangeable.
Capitalism: an
economic system in
which resources and
means of production
are privately owned
and prices,
production, and the
distribution of goods
are determined
mainly by
competition in a free
market. The United
States in a capitalist
economy.
Since markets are not perfect, governments
intervene and often play a major role in the
economy. Some of the goals of government are
to:
 Minimize market inefficiencies
 Provide public goods
 Redistribute income
 Stabilize the macroeconomy:
 Promote low levels of unemployment
 Promote low levels of inflation