PPT PRS Econ CH02 9e
e ic ho
PowerPoint Lectures for
C nd
Principles of Economics
a ity
9e
rc ca S
; ;
By
: em bl
Karl E. Case
ro P
Ray C. Fair &
ic m
Sharon M. Oster
no co E he T e ic ho C nd a ity rc ca S : em bl ro P ic m no co E he T
2 PART I INTRODUCTION TO ECONOMICS The Economic Problem: Scarcity
and Choice PART I INTRODUCTION TO ECONOMICS
2 The Economic
e
Problem: Scarcity
ic ho C
and Choice
nd
CHAPTER OUTLINE
a ity
Scarcity, Choice, and
rc
Opportunity Cost
ca
Scarcity and Choice in a One-
S :
Person Economy
em
Scarcity and Choice in an Economy
bl
of Two or More
ro P
The Production Possibility Frontier
ic
The Economic Problem
m no
Economic Systems
co
Command Economies
E
Laissez-Faire Economies:
he T
The Economic Problem: Scarcity And Choice FIGURE 2.1 The Three Basic Questions
e ic
Every society has some system or process that transforms its scarce resources into
ho
useful goods and services. In doing so, it must decide what gets produced, how it is
C
produced, and to whom it is distributed. The primary resources that must be allocated
nd are land, labor, and capital. a ity rc ca S : em bl ro P ic m no co E he T
The Economic Problem: Scarcity And Choice
e ic ho C nd
capital Things that are produced and then used in
a ity the production of other goods and services. rc ca S : em bl
factors of production (or factors) The inputs into
ro
the process of production. Another term for
P ic
resources.
m no co E he T
The Economic Problem: Scarcity And Choice
e ic ho C nd
production The process that transforms scarce
a resources into useful goods and services. ity rc ca S :
inputs or resources Anything provided by nature
em bl
or previous generations that can be used directly or
ro
P indirectly to satisfy human wants
ic m no co E outputs Goods and services of value to households. he T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in a One-Person Economy
e ic ho C nd a
Nearly all the same basic decisions that
ity rc
characterize complex economies must also be
ca S made in a simple economy. : em bl ro P ic m no co E he T
What is the difference between a single-person economy and a more complex economy? a. Most decisions that characterize a complex economy don’t have to be made by an economy with a single person.
e
b. Most resources that are scarce in a complex economy are
ic ho usually abundant in a simple economy. C
c. In a single-person economy, the concept of opportunity cost
nd a
does not apply.
ity rc
d. In a single-person economy, the mechanics of decision
ca S
making are simpler than those of a more complex economy.
: eme. All of the above.
bl ro P ic m no co E he T
What is the difference between a single-person economy and a more complex economy? a. Most decisions that characterize a complex economy don’t have to be made by an economy with a single person.
e
b. Most resources that are scarce in a complex economy are
ic ho usually abundant in a simple economy. C
c. In a single-person economy, the concept of opportunity cost
nd a
does not apply.
ity rc
d. In a single-person economy, the mechanics of decision
d. In a single-person economy, the mechanics of decision
ca S
making are simpler than those of a more complex making are simpler than those of a more complex
: economy.
economy.
em bl
ro P ic m no co E he T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in a One-Person Economy
e ic ho C nd
Opportunity Cost
a ity rc ca
The concepts of constrained choice and scarcity
S :
are central to the discipline of economics.
em bl ro P icopportunity costs The best alternative that we
m no
give up, or forgo, when we make a choice or
co decision. E he T
Using a day at the beach as an example, what is the opportunity cost of leisure?
a. Leisure is free. For example, you don’t have to pay for the benefit
of enjoying the sun or relaxing at the beach.e ic
b. Leisure has an opportunity cost only if there is a cost associated
ho
with it. For example, entering the beach may require you to pay a
C fee. nd a
c. The opportunity cost of leisure at the beach is the value of the
ity rc
things that you could have produced during the time you were at
ca S
the beach. For example, you could have used the time to work
: and earn some money. em bl
d. According to economists, leisure activities are the only activities
ro
P that do not carry an opportunity cost
ic m no co E he T
Using a day at the beach as an example, what is the opportunity cost of leisure?
a. Leisure is free. For example, you don’t have to pay for the benefit
of enjoying the sun or relaxing at the beach.e ic
b. Leisure has an opportunity cost only if there is a cost associated
ho
with it. For example, entering the beach may require you to pay a
C fee. nd a
c. The opportunity cost of leisure at the beach is the value of
ity
c. The opportunity cost of leisure at the beach is the value of
rc
the things that you could have produced during the time you the things that you could have produced during the time you
ca S
were at the beach. For example, you could have used the were at the beach. For example, you could have used the
: time to work and earn some money.
time to work and earn some money.
em bl
ro
P that do not carry an opportunity cost
ic m no co E he T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in a One-Person Economy
e ic ho C nd
Opportunity Cost
a ity rc ca S : em bl
Frozen Foods and
ro P
Opportunity Costs
ic m
The growth of the frozen dinner
no co
entrée market in the last 50 years
E
is a good example of the role of
he T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in an Economy of Two or More
e ic ho C nd
Specialization, Exchange, and Comparative Advantage
a ity rc ca S :
theory of comparative advantage Ricardo’s
em bl theory that specialization and free trade will benefit ro
all trading parties, even those that may be
P ic
“absolutely” more efficient producers.
m no co E he T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in an Economy of Two or More
FIGURE 2.2 Comparative Advantage and the Gains from Trade
e
In this figure, (a) shows the number of
ic
logs and bushels of food that Colleen
ho C and Bill can produce for every day nd
spent at the task
a
and (b) shows how much output
ity
they could produce in a month,
rc ca assuming they wanted an equal S number of logs and bushels. :
Colleen would split her time 50/50,
em bl devoting 15 days to each task and ro
achieving total output of 150 logs
P
and 150 bushels of food. Bill would
ic m
spend 20 days cutting wood and 10
no days gathering food. co
As shown in (c) and (d), by specializing
E
and trading, both Colleen and Bill will be
he T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in an Economy of Two or More
e ic ho C nd
Specialization, Exchange, and Comparative Advantage
a ity rc ca
absolute advantage A producer has an absolute
S :
advantage over another in the production of a
em
good or service if he or she can produce that
bl ro
product using fewer resources.
P ic m no
comparative advantage A producer has a
co
comparative advantage over another in the
E he
production of a good or service if he or she can
T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in an Economy of Two or More
e ic
A Graphical Presentation of Comparative Advantage and Gains
ho
from Trade
C nd a ity
FIGURE 2.3a Production Possibilities
rc
with No Trade
ca
The figure in (a) shows all of the
S :
combinations of logs and bushels
em
of food that Colleen can produce
bl ro
by herself. If she spends all 30
P
days each month on logs, she
ic m
produces 300 logs and no food
no (point A). co
If she spends all 30 days on food,
E
she produces 300 bushels of food
he T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in an Economy of Two or More
e ic
A Graphical Presentation of Comparative Advantage and Gains
ho
from Trade
C nd a ity
FIGURE 2.3b Production Possibilities
rc
with No Trade
ca S The figure in (b) shows all of the :
combinations of logs and bushels
em
of food that Bill can produce by
bl ro
himself. If he spends all 30 days
P
each month on logs, he produces
ic m
120 logs and no food (point D).
no
If he spends all 30 days on food,
co
he produces 240 bushels of food
E and no logs (point E). he T
Scarcity, Choice, And Opportunity Cost
Scarcity and Choice in an Economy of Two or More
e ic ho C nd a ity rc ca S : em bl ro P ic m no co E
FIGURE 2.4 Colleen and Bill Gain from Tradehe
By specializing and engaging in trade, Colleen and Bill can move beyond their own production possibilities. If
T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in an Economy of Two or More
e ic ho C nd
Weighing Present and Expected Future Costs and Benefits
a ity rc ca S
We trade off present and future benefits in small
: ways all the time. em bl ro P ic m no co E he T
Scarcity, Choice, And Opportunity Cost Scarcity and Choice in an Economy of Two or More
e ic ho C nd
Capital Goods and Consumer Goods
a ity rc ca
consumer goods Goods produced for present
S : consumption. em bl ro P
investment The process of using resources to
ic m
produce new capital.
no co E he T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic ho C nd
production possibility frontier (ppf) A graph that
a ity shows all the combinations of goods and services rc
that can be produced if all of society’s resources
ca
S are used efficiently
: em bl ro P ic m no co E he T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic
All points below and to the left of
ho
the curve (the shaded area)
C
represent combinations of capital
nd a
and consumer goods that are
ity
possible for the society given the
rc
resources available and existing
ca S technology. :
Points above and to the right of the
em bl curve, such as point G, represent ro
combinations that cannot be
P reached. ic m
If an economy were to end up at
no
point A on the graph, it would be
co
producing no consumer goods at
E
all; all resources would be used for
he T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic ho C
Although an economy may be
nd a
operating with full employment of its
ity
land, labor, and capital resources, it
rc
may still be operating inside its ppf,
ca S
at a point such as D. The economy
:
could be using those resources
em bl inefficiently. ro
Periods of unemployment also
P
correspond to points inside the ppf,
ic m
such as point D.
no
Moving onto the frontier from a
co
point such as D means achieving
E full employment of resources. he T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic ho C
FIGURE 2.5 Production Possibility
nd
Frontier
a ity
The ppf illustrates a number of
rc
economic concepts. One of the
ca S
most important is opportunity
:
cost. The opportunity cost of
em
producing more capital goods is
bl ro
fewer consumer goods.
P
Moving from E to F, the number
ic m
of capital goods increases from
no
550 to 800, but the number of
co
consumer goods decreases
E from 1,300 to 1,100. he T
Consider the figure below. As this country moves from point D to point B along the production possibility frontier AE, a. the opportunity cost of building more consumer goods rises.
b. the opportunity cost of building more capital goods rises.
e ic
c. the opportunity cost is not affected because the curve does not shift.
ho C
d. the opportunity cost of producing more of either consumer goods or
nd a
capital goods rises.
ity rc ca S : em bl ro P ic m no co E he T
Consider the figure below. As this country moves from point D to point B along the production possibility frontier AE, a. the opportunity cost of building more consumer goods rises.
b. the opportunity cost of building more capital goods rises.
b. the opportunity cost of building more capital goods rises.
e ic
c. the opportunity cost is not affected because the curve does not shift.
ho C
d. the opportunity cost of producing more of either consumer goods or
nd a
capital goods rises.
ity rc ca S : em bl ro P ic m no co E he T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic ho C nd
Unemployment
a ity rc ca
During economic downturns or recessions,
S :
industrial plants run at less than their total
em bl
capacity. When there is unemployment of labor
ro and capital, we are not producing all that we can. P ic m no co E he T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic ho
Inefficiency
C nd a ity rc
Waste and mismanagement are the results of a
ca S firm’s operating below its potential. : em bl
Sometimes, inefficiency results from
ro P
mismanagement of the economy instead of
ic m
mismanagement of individual private firms.
no co E he T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic ho
Inefficiency
C nd
FIGURE 2.6 Inefficiency from
a
Misallocation of Land in Farming Society can end up inside its
ity rc
ppf at a point such as A by
ca
using its resources
S : inefficiently. em If, for example, Ohio’s bl
climate and soil were best
ro
suited for corn production
P ic
and those of Kansas were
m
best suited for wheat
no
production, a law forcing
co E
Kansas farmers to produce
he
corn and Ohio farmers to
T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic ho C nd
The Efficient Mix of Output
a ity rc ca
To be efficient, an economy must produce what
S : people want. em bl ro P ic m
Negative Slope and Opportunity Cost
no co E he
marginal rate of transformation (MRT) The
T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier The Law of Increasing Opportunity Cost
e
TABLE 2.1 Production Possibility Scheduleic
for Total Corn and Wheat
ho
Production in Ohio and Kansas
C nd
Total Total
a
Corn Production Wheat Production
ity
Point (Millions of (Millions of Bushels
rc
on ppf Bushels Per Year) Per Year)
ca S
A 700 100
: em B 650 200 bl ro C 510 380 P ic
D 400 500
m
E 300 550
no co
FIGURE 2.7 Corn and Wheat ProductionE
in Ohio and Kansas
he
The ppf illustrates that the opportunity cost of corn
T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic ho C nd
Economic Growth
a ity rc ca S :
economic growth An increase in the total output
em
of an economy. It occurs when a society acquires
bl ro
new resources or when it learns to produce more
P ic
using existing resources.
m no co E he T
Refer to the figure. A 10-ton increase in the production of farm goods requires a sacrifice of manufactured goods that is:
e ic
a. greater between points b and c than
ho C between points e and f. nd
b. greater between points e and f than
a ity
between points b and c.
rc ca
c. proportionally the same between
S : any two points. em bl
d. less and less as you move
ro downward along the curve. P ic m no co E he T
Refer to the figure. A 10-ton increase in the production of farm goods requires a sacrifice of manufactured goods that is:
e ic
a. greater between points b and c than
ho C between points e and f. nd
b. greater between points e and f
a
b. greater between points e and f
ity than between points than between points b b and and c c . . rc ca
c. proportionally the same between
S : any two points. em bl
d. less and less as you move
ro downward along the curve. P ic m no co E he T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic
Economic Growth
ho C
TABLE 2.2 Increasing Productivity in Corn and Wheat Productionnd a
in the United States, 1935–2007
ity rc
CORN WHEAT
ca
Yield Per Acre Labor Hours Per Yield Per Acre Labor Hours
S :
(Bushels) 100 Bushels (Bushels) Per 100 Bushels
em bl 1935–1939
26.1 108
13.2
67
ro
1945–1949
36.1
53
16.9
34 P 1955–1959
48.7
20
22.3
17
ic
1965–1969
78.5
7
27.5
11
m
1975–1979
95.3
4
31.3
9
no
1981–1985 107.2
3
36.9
7
co a a E
1985–1990 112.8 NA a
38.0 NA a
he
1990–1995 120.6 NA
38.1 NA
T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic
Economic Growth
ho C
FIGURE 2.8 Economic Growth
nd
Shifts the PPF Up and to the Right
a ity
Productivity increases have
rc
enhanced the ability of the
ca S
United States to produce both
:
corn and wheat. As Table 2.2
em
shows, productivity increases
bl ro
were more dramatic for corn
P
than for wheat. Thus, the shifts
ic m
in the ppf were not parallel.
no co
Note: The ppf also shifts if the
E
amount of land or labor in corn and
he
wheat production changes. Although
T
Scarcity, Choice, And Opportunity Cost The Production Possibility Frontier
e ic
Sources of Growth and the Dilemma of Poor Countries
ho C
FIGURE 2.9 Capital Goods and
nd
Growth in Poor and Rich Countries
a ity
Rich countries find it easier than
rc
poor countries to devote
ca S resources to the production of :
capital, and the more resources
em
that flow into capital production,
bl ro
the faster the rate of economic
P growth. ic m
Thus, the gap between poor
no
and rich countries has grown
co over time. E he T
Scarcity, Choice, And Opportunity Cost The Economic Problem
e ic ho C nd
Recall the three basic questions facing all
a ity economic systems: rc ca S
(1) What gets produced?
: em bl
(2) How is it produced?
ro P ic m
(3) Who gets it?
no co E
Given scarce resources, how do large, complex
he T societies go about answering the three basic
Economic Systems Command Economies
e ic ho C nd
command economy An economy in which a
a ity central government either directly or indirectly sets rc output targets, incomes, and prices. ca S : em bl ro P ic m no co E he T
Economic Systems Laissez-faire Economies: The Free Market
e ic ho C nd
laissez-faire economy Literally from the French:
a ity “allow [them] to do.” An economy in which rc
individual people and firms pursue their own self-
ca
S interest without any central direction or regulation
: em bl ro P market The institution through which buyers and ic m sellers interact and engage in exchange. no co E
Some markets are simple and others are complex, but they all
he T
A market exists primarily in what type of economic system? a. A command economy.
b. A laissez-faire economy.
e c. A democracy. ic ho
d. A dictatorship.
C e. An economy in transition
nd a ity rc ca S : em bl ro P ic m no co E he T
A market exists primarily in what type of economic system? a. A command economy.
b.
e c. A democracy. ic ho
C e. An economy in transition
nd a ity rc ca S : em bl ro P ic m no co E he T
Economic Systems Laissez-faire Economies: The Free Market
e ic ho C nd
Consumer Sovereignty
a ity rc ca S
consumer sovereignty The idea that consumers
:
ultimately dictate what will be produced (or not
em bl
produced) by choosing what to purchase (and
ro
P what not to purchase)
ic m no co E he T
Economic Systems Laissez-faire Economies: The Free Market
e ic ho C nd
Individual Production Decisions: Free Enterprise
a ity rc ca S :
free enterprise The freedom of individuals to
em bl
start and operate private businesses in search of
ro
P profits
ic m no co E he T
Economic Systems Laissez-faire Economies: The Free Market
e ic ho C nd
Distribution of Output
a ity rc ca
The amount that any one household gets depends on its
S : income and wealth. em bl ro Income is the amount that a household earns each year.
P ic
It comes in a number of forms: wages, salaries, interest,
m no
and the like.
co E he
Wealth is the amount that households have accumulated
T
Which of the following problems are typical of a market system?
a. The market system does not always produce what people want at the lowest possible cost.
b. The market system offers rewards (income) that may be unfairly
e ic
distributed, and some groups may be left out.
ho C c. Periods of unemployment and inflation recur with some regularity. nd a
d. All of the above.
ity rc
e. None of the above.
ca S : em bl ro P ic m no co E he T
Which of the following problems are typical of a market system?
a. The market system does not always produce what people want at the lowest possible cost.
b. The market system offers rewards (income) that may be unfairly
e ic
distributed, and some groups may be left out.
ho C c. Periods of unemployment and inflation recur with some regularity. nd a
d. All of the above.
d. All of the above.
ity rc
ca S : em bl ro P ic m no co E he T
Economic Systems Laissez-faire Economies: The Free Market
e ic ho C nd
Price Theory
a ity rc ca
In a free market system, the basic economic questions are
S :
answered without the help of a central government plan or
em bl
directives. This is what the “free” in free market means—the
ro system is left to operate on its own with no outside interference. P ic
Individuals pursuing their own self-interest will go into business
m no
and produce the products and services that people want. Other
co
individuals will decide whether to acquire skills; whether to work;
E he
and whether to buy, sell, invest, or save the income that they
T
Economic Systems Mixed Systems, Markets, And Governments
e ic ho C nd
The differences between command economies and
a ity
laissez-faire economies in their pure forms are
rc ca
enormous. In fact, these pure forms do not exist in the
S :
world; all real systems are in some sense “mixed.”
em bl ro P ic m no co E he T absolute advantage investments
e ic ho
capital laissez-faire economy
C nd
command economy marginal rate of transformation
a ity
(MRT)
rc
comparative advantage
ca
market
S :
consumer goods
em
opportunity cost
bl
consumer sovereignty
ro P
outputs
ic
economic growth
m
production
no
factors of production (or factors)
co E
production possibility frontier (ppf) free enterprise
he T