Economics Today: The Macro View, 19/e - Chapter Two: Scarcity and the World of Trade-Offs

What is the difference between goods and economics goods?

Goods are all things from which individuals derive satisfaction or happiness and economics goods is a subset of all goods—they are scarce goods, about which we must constantly make decisions regarding their best use. By definition, the desired quantity of an economic good exceeds the amount that is available at a zero price.

What does specialization lead to?

Greater productivity, not only for each individual but also for the nation.

Factors of production: Human capital

Human capital is the economic characterization of the education and training of workers. How much the nation produces depends not only on how many hours people work but also on how productive they are, and that in turn depends in part on education and training. To become more educated, individuals have to devote time and resources, just as a business has to devote resources if it wants to increase its physical capital. Whenever a worker's skills increase, human capital has been improved.

Example of Economic Growth and the Production Possibilities Curve

If the nation experiences economic growth, the production possibilities curve between smartphones and tablets will move out as shown. This output increase takes time, however, and it does not occur automatically. This means, therefore, that we can have more of both smartphones and tablets only after a period of time during which we have experienced economic growth.

What is scarcity not?

- not a shortage - not the same thing as poverty

What are the five classification of factors of production?

1) Land 2) Labor 3) Physical capital 4) Human capital 5) Entrepreneurship

Assumptions Underlying the Production Possibilities Curve

1. Resources are fully employed. 2. Production takes place over a specific time period—for example, one year. 3. The resource inputs, in both quantity and quality, used to produce smartphones or tablets are fixed over this time period. 4. Technology does not change over this time period.

Example of trade-offs

A trade-off between the results of spending time studying economics and mathematics. For the sake of this argument, we will assume that additional time studying either economics or mathematics will lead to a higher grade in the subject to which additional study time is allocated.

Production Possibilities Curve

A curve representing all possible combinations of maximum outputs that could be produced, assuming a fixed amount of productive resources of a given quality

Straight-line production possibilities curve (GRADES EX)

A graphical representation of the opportunity cost of studying one more hour in one subject.

Distinguish between absolute and comparative advantage

A person has an absolute advantage if she can produce more of a good than someone else who uses the same amount of resources. An individual can gain from specializing in producing a good if she has a comparative advantage in producing that good, meaning that she can produce the good at a lower opportunity cost than someone else.

What are the reasons for economic growth?

An increases in the number of workers and productive investment in equipment.

Why does scarcity exist?

Because resources are insufficient to satisfy our every desire. Resources are the inputs used in the production of the things that we want.

Example of capital goods

Before fish are "produced" for the market, equipment such as fishing boats, nets, and poles is produced first. Imagine how expensive it would be to obtain fish for market without using these capital goods. Catching fish with one's hands is not an easy task. The cost per fish would be very high if capital goods weren't used.

Why do does a nation fave the law of increasing additional cost?

Certain resources are better suited for producing some goods than other goods. Generally, resources are not perfectly adaptable for alternative uses. When increasing the output of a particular good, producers must use less suitable resources than those already used in order to produce the additional output. Hence, the cost of producing the additional units increases.

Economic Growth and the Production Possibilities Curve

Economic Growth Allows for More of Everything

Rational self-interest

Economists assume that individuals are rational in that they will do what is in their own self-interest. They will not consciously carry out actions that will make them worse off. People will make choices based on their self-interest and when people make choices, they attempt to maximize benefits net of opportunity cost. In so doing, individuals choose their comparative advantage and end up specializing.

Factors of production: Entrepreneurship

Entrepreneurship (actually a subdivision of labor) is the component of human resources that performs the functions of organizing, managing, and assembling the other factors of production to create and operate business ventures. Entrepreneurship also encompasses taking risks that involve the possibility of losing large sums of wealth. It includes new methods of engaging in common activities and generally experimenting with any type of new thinking that could lead to making more income. Without entrepreneurship, hardly any business organizations could continue to operate.

Difference between interstate and international trade

European Union (EU) is comparable to the United States in area and population, but instead of one nation, the EU has 27. What U.S. residents call interstate trade, Europeans call international trade. There is no difference, however, in the economic results—both yield greater economic efficiency and higher average incomes

Evaluate why everyone, whether poor or affluent, faces the problem of scarcity

Even the richest people face scarcity because they have to make choices among alternatives. Despite their high levels of income or wealth, affluent people, like everyone else, want more than they can have (in terms of goods, power, prestige, and so on).

How is it that scarcity occurs among the poor and among the rich, thus even the richest person on earth faces scarcity?

Even the world's richest person has only limited time available. Low income levels do not create more scarcity. High income levels do not create less scarcity.

The Trade-Off between Consumption Goods and Capital Goods

Every time we make a choice of more goods today, we incur an opportunity cost of fewer goods tomorrow. Every time we make a choice of more goods in the future, we incur an opportunity cost of fewer goods today.

What is the he resources used in production are called?

Factors of production

How could you determine the value of what you gave up to engage in that extra hour of studying economics?

First of all, no one else can tell you the answer because only you can put a value on the alternatives forgone

Explain why the economy faces a trade-off between consumption goods and capital goods

If we allocate more resources to producing capital goods today, then the production possibilities curve will shift outward by more in the future, which means that we can have additional future consumption goods. The trade-off is that producing more capital goods today entails giving up consumption goods today.

What does it mean when a point lies beneath the production possibilities curve?

Imply unemployed or underemployed resources.

What does it mean when a point lies outside the production possibilities curve?

It is impossible to achieve during the time period assumed. By definition, the PPC indicates the maximum quantity of one good, given the quantity produced of the other good.

What is the a good the natural fact of scarcity?

Its implies that we must make choices. One of the most important results of this fact is that every choice made means that some opportunity must be sacrificed. Every choice involves giving up an opportunity to produce or consume something else.

Factors of production: Labor

Labor is the human resource, which includes productive contributions made by individuals who work, such as Web page designers, iPad applications creators, and professional football players.

Factors of production: Land

Land encompasses all the nonhuman gifts of nature, including timber, water, fish, minerals, and the original fertility of land. It is often called the natural resource.

Efficiency in economics

Means productive efficiency. An economy is productively efficient whenever it is producing the maximum output with given technology and resources.

Scarcity

Means that we do not ever have enough of everything, including time, to satisfy our every desire. Scarcity exists because human wants always exceed what can be produced with the limited resources and time that nature makes available.

What is a bowed curve?

Not constant - EX: the trade-off between production of smartphones and tablet production is not constant

Does absolute advantage matter in determining how you will allocate your time?

Only comparative advantage, not absolute advantage, matters in determining how you will allocate your time. Comparative advantage determines your choice because it involves the highest-valued alternative in a decision about time allocation.

Explain why the scarcity problem causes people to consider opportunity costs and trade-offs among choices

Opportunity cost is the highest-valued alternative that one must give up to obtain an item. The trade-offs people face can be represented by a production possibilities curve (PPC). Moving along a PPC from one point to another entails incurring an opportunity cost of allocating scarce resources toward the production of one good instead of another good.

Opportunity cost

Opportunity cost of any action is the value of what is given up—the next-highest-ranked alternative—because a choice was made.

Factors of production: Physical capital

Physical capital consists of the factories and equipment used in production. It also includes improvements to natural resources, such as irrigation ditches.

How can economics help to explain why most people have only one sex partner?

Relates to trade-offs and opportunity costs. For some people, the opportunity cost of the time required to maintain involvement with multiple sex partners rather than to devote that time to earning income or alternative next-highest-valued activities is too high. For many others, trying to maintain additional partnerships for physical intimacy can threaten the loss of the partner most willing and able to provide highly valued assistance in maintaining one's broader emotional and physical health.

Does scarcity still exist during an economic growth?

Scarcity still exists, however, no matter how much economic growth takes place. At any point in time, we will always be on some production possibilities curve. Thus, we will always face trade-offs. The more we have of one thing, the less we can have of others. If economic growth occurs in the nation, the production possibilities curve between smartphones and tablets moves outward. This takes time and does not occur automatically. One reason it will occur involves the choice about how much to consume today.

Consumption

Spending on new goods and services to be used up out of a household's current income. Whatever is not consumed is saved. Consumption includes such things as buying food and going to a concert. Also the use of goods and services for personal satisfaction.

Comparative advantage in trade among regions

The Plains states have a comparative advantage in the production of grains and other agricultural goods. Relative to the Plains states, the states to the east tend to specialize in industrialized production, such as automobiles. Not surprisingly, grains are shipped from the Plains states to the eastern states, and automobiles are shipped in the reverse direction. Such specialization and trade allow for higher incomes and standards of living.

Absolute advantage

The ability to produce more units of a good or service using a given quantity of labor or resource inputs. Equivalently, the ability to produce the same quantity of good or service using fewer units of labor or resource inputs

One-to-one trade off

The opportunity cost of receiving one grade higher in economics (for example, improving from a C to a B) is one grade lower in mathematics (falling from a C to a D).

Two-Good example

The production of smartphones and tablet devices. If all resources are devoted to smartphone production, 50 million per year can be produced. If all resources are devoted to production of tablets, 60 million per year can be produced

Why would we be willing to use productive resources to make things—capital goods—that we cannot consume directly?

The reason is that capital goods enable us to produce larger quantities of consumer goods or to produce them less expensively than we otherwise could

What determines what an economy can produce?

The total quantity of all resources that an economy has at any one time determines what that economy can produce

What happens if the resources that we don't use to produce consumer goods for today?

Then we invest in capital goods that will produce more consumer goods for us later.

Ex of PPC

We assume that only 6 hours can be spent per week on studying. If the student is at point x, equal time (3 hours a week) is spent on both courses, and equal grades of C will be received. If a higher grade in economics is desired, the student may go to point y, thereby receiving a B in economics but a D in mathematics. At point y, 2 hours are spent on mathematics and 4 hours on economics.

How can I think of technology as a formula or recipe?

When better formulas are developed, more production can be obtained from the same amount of resources. The level of technology sets the limit on the amount and types of goods and services that we can derive from any given amount of resources. The production possibilities curve is drawn under the assumptions that we use the best technology we currently have available and that this technology doesn't change over the time period under study.

Discuss why obtaining increasing increments of any particular good typically entails giving up more and more units of other goods

When people allocate additional resources to producing more units of a good, it must increasingly employ resources that would be better suited for producing other goods. As a result, the law of increasing additional cost holds. Each additional unit of a good can be obtained only by giving up more and more of other goods. Hence, the production possibilities curve is bowed outward.

The Law of Increasing Additional Cost

When people take more resources and apply them to the production of any specific good, the opportunity cost increases for each additional unit produced.

Trade-offs

Whenever you engage in any activity using any resource, even time, you are trading off the use of that resource for one or more alternative uses. The extent of the trade-off is represented by the opportunity cost. The opportunity cost of studying economics has already been mentioned—it is the value of the next-best alternative. When you think of any alternative, you are thinking of trade-offs.

Ex of comparative advantage

You may be able to change the oil in your car. You might even be able to change it faster than the local mechanic. But if the opportunity cost you face by changing the oil exceeds the mechanic's opportunity cost, the mechanic has a comparative advantage in changing the oil. The mechanic faces a lower opportunity cost for that activity.

Can a society be outside the PPC?

a society cannot be outside the production possibilities curve. Over time, however, it is possible to have more of everything, which occurs through economic growth

Example of goods

air to breathe and the beauty of a sunset as well as food, cars, and iPhones.

Production

any activity that results in the conversion of resources into products that can be used in consumption.

Inefficient point

any point below the production possibilities curve (we are not getting the most out of what we have)

Example of economic goods

cars, tablet devices, smartphones, socks, baseball bats, and corn.

What does production include?

includes delivering items from one part of the country to another and taking ice from an ice tray to put it in your soft-drink glass. The

Specialization

involves working at a relatively well-defined, limited endeavor, such as accounting or teaching.

Example of services

laundry, Internet access, hospital care, restaurant meal preparation, car polishing, psychological counseling, and teaching

Ex of absolute advantage

might be able to enter data into a spreadsheet program faster than any of the other employees, file documents in order in a file cabinet faster than any of the file clerks, and wash windows faster than any of the window washers.

Services

tasks that are performed by individuals, often for someone else. One way of looking at services is to think of them as intangible goods.

Comparative advantage

the ability to perform an activity at a lower opportunity cost

Division of Labor

the segregation of resources into different specific tasks. For instance, one automobile worker puts on bumpers, another doors, and so on.

Technology

the total pool of applied knowledge concerning how goods and services can be produced by managers, workers, engineers, scientists, and artisans, using land, physical and human capital, and entrepreneurship.

What is the PCC used for?

to demonstrate the related concepts of scarcity, choice, and trade-offs that our entire nation faces.

Ex of specialization

you could replace a cracked smartphone screen if you wanted to. Typically, though, you take your smartphone to a repair shop and let a technician replace the screen. You benefit by letting the technician specialize in replacing the screen and in doing other repairs on your smartphone.