scarcity and choice notes

8/2/2019 Scarcity and Choice Notes

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Recommended Text:

Basic Economics14th EditionFrank V. Mastrianna

CERTIFICATE IN ECONOMICS &FINANCIAL APPLICATIONS 1

ECONOMICS


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TOPIC 1

The Nature and Scope of Economics

Scarcity & Choice

Economic System


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ECONOMICS DEFINED

How people and institutions within a

society make choices

How the choices determine the use of

societys limited resources

3


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ECONOMICSASA SCIENCE

An organized body of knowledge

Coordinated, arranged, and systematized according to

general laws and principles

Social science

A study of the behavior and interactions of human beings as

individuals and in groups

Economics is closely link to psychology as it deals with human

behaviour

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ECONOMIC THEORYAND POLICY

Economic theory

Develops rules and principles

A guide for action under a given set of circumstances

Economic policy

Action actually taken under a given set of circumstances

Commonly modified by political, military, and social aspects

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PRODUCTION

Production

The creation or addition of utility

Utility the ability of a good or service to

satisfy a want

Total product the sum of all goods and

services produced by an economy over agiven period of time

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DISTRIBUTION

Distribution

The allocation of the total product among

the productive resources

Monetarily the distribution of money

incomes among the owners of the

productive resources

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PRODUCTIVE RESOURCES

Inputs or resources necessary before a person orbusiness can engage in the production of goods orservices

Labor the time and effort expended by humanbeings involved in the production process

Land the resources of the land, sea, and air(includes all natural resources)

Capital goods used to produce other goods and

services eg machines, buildings, trucks, etc. Investment act of adding to the supply of capital

Enterprise the act of organizing and assuming therisk of a business venture Entrepreneur a person who organizes and assumes the

risk of a business venture

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FUNCTIONAL DISTRIBUTIONOF INCOME

9

RESOURCES

Labor

Land

Capital

Enterprise

TYPES OF

PAYMENT

Wages

Rent

Interest

Profits

TOTAL

PRODUCT


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POSITIVEAND NORMATIVE ECONOMICS

Positive economics

The scientific study of what is among economicrelationships

Concerns matters that are the result ofinvestigationsthat are verifiable

Eg: When price goes up, people usually buy less of agood, ceteris paribus

Normative economics The area of economics dealing with what ought to be

(involving value judgment)

Combines economics and politics and policy 10


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CONSUMPTION

The use of a good or service

The ultimate end of economic activity

Production and distribution are driven

by consumption desires

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ECONOMIC GOODS

An object or service Utilitysatisfy a want

Scarceinsufficient to meet everyones wants

Transferable

Scarcity Not a sufficient amount available to meet everyones wants

A price has to be paid to obtain the good or service

The greater the scarcity of an economic good, the greater itsvalue or price

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GOODSAND SERVICES

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Consumer goods

Capital goodsPublic good

Free good


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FREE GOODSAND PUBLIC GOODS

Free good

A good that lacks the element of scarcity

no price

Eg air, sunshine, water (in some cases)

Public good

An economic good to the supplier Free to the user

Public parks, libraries, and the interstate

highway system

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CONSUMERAND CAPITAL GOODS

Consumer goods

Goods that are directly used by theconsuming public

Books, paper, food, and clothing

Capital goods

Goods used to produce other consumeror capital goods

Buildings, machinery, and equipment,raw materials and WIP

Durable and nondurable

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WEALTHAND INCOME

Wealth

Things of value owned at a particular time

Human capital

The stock of labor talents and skills used to increase

productivity

Total income

The total value of the goods and services produced over a

period of time (usually 1 year)

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MICROECONOMICSAND MACROECONOMICS

Microeconomics

Deals with the economic problems of the individual, the firm,

and the industry

Macroeconomics Deals with the aggregates of economics including total

production, total employment, and general price level

Studies the performance of the economy as a whole

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Scarcity and Choice

Copyright (c) 2007 by Thomson South-Western. All rights reserved.


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MAKING CHOICES

Individual choices With limited income, choices have to be made as to what to

buy and what to give up to maximise our satisfaction

Firm choices Firms and businesses have to decide what to produce, where

to produce, how to produce and who to produce for?

National choices Laborsize, educational level, skills and attitude

Landavailability of natural resources Capitalamount of capital and technological development

Enterpriseentrepreneur skills, foresight and organisationalability

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PRODUCTION POSSIBILITIES CURVE

The concepts of scarcity, choice and opportunity costapply to the individual as well as to the economy as awhole.

An economy is a mechanism which a country uses to allocatescarce resources among alternative uses.

Concepts will be more clearly shown using the PPC.

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Shows the alternative combinations of

different goods and services that a

society can produce given its availableresources and technology

Figure 2-1 illustrates the production

possibilities curve for houses and food

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221 2 3 4 5

15

12

9

6

3

0

Food (millions of pounds)

H

ouses(thousa

nds)

AB

C

D

E

F

Points A and Freferto the maximumamount of each

good that can beproduced


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231 2 3 4 5

15

12

9

6

3

0


Houses(thousa

nds)

AB

C

D

E

F

As we move in eitherdirection along thecurve, we choose

among the alternativecombinations of foodand housing


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Production Possibilities Curve

1 2 3 4 5

15

12

9

6

3

0


Houses(thousa

nds)

AB

C

D

E

F

At point D, the economycan produce 9,000houses and 3 million

pounds of food can beproduced given existingresources andtechnology


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Production Possibilities Curve

1 2 3 4 5

15

12

9

6

3

0


Houses(thousa

nds)

AB

C

D

E

F

If we move from pointDto point E, wesacrifice 3,000 homesand gain 1 million

pounds of food

This trade-off isknown as theopportunity cost


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OPPORTUNITY COST(CHIPHICOHOI)

The value of the next-best

alternative(gia tri su dung) that must

be sacrificed when a choice is made

Thus, the opportunity cost of

increasing the output of food from 3 to

4 million poundsmoving from point

D to pointEequals the 3,000 houses

that must be given up26


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OPPORTUNITY COST

ANEXAMPLEINCALCULATION

Moving from point A to B, 2million units of consumer goodshave to be given up for the first

10 million units of capital goods. OC per unit of capital good

can be calculated as follows:

Change in consumer goods /Change in capital goods

(50

48)/ (10

0) = 2 million/10 million

0.2 unit of consumer good

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OPPORTUNITY COST

ANEXAMPLEINCALCULATION

Moving from point B to C, 5

million units of consumer goods

have to be given up for the

second 10 million units ofcapital goods.

OC per unit of capital good

can be calculated as follows

Change in consumer goods/change in capital goods

(4843)/ (2010)

= 5 million/10 million

0.5 unit of consumer good

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SHAPEOFTHE PRODUCTION POSSIBILITIES CURVE

The production possibilities curve is

curved outward because resources are

not equally suited for producing bothhouses and food

As we move from pointA towards

point F, we sacrifice more and more

houses to gain equal increments of

food opportunity costs increase29


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POINTSINSIDETHE PPC

Attainable combinations BUT representcombinations which do not fully or efficiently

employ resources (e.g. point U). Involve unemployment or underemployment of

resources.

When economy is on a point inside the PPC,additional units of one good can be obtainedwithout getting less of another good.

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EXPANSIONOF OUTPUTFROMWITHINTHECURRENT PRODUCTION POSSIBILITIES CURVE

311 2 3 4 5

15

12

9

6

3

0


Houses(thousa

nds)

AB

C

D

E

F

pp1

U

When the nation is operating inside the

current production possibilities curvefor

example, at point Uit is a result of either

idle or unemployed resources from a

recession or from less than maximumefficiency in the use of resources in a full-

employment economy


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POINTS OUTSIDETHE PPC

Represent unattainable combinations, given current fixedresources and technology.

Possible only with new sources of economic growth.

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EXPANSIONOF OUTPUTFROMBEYONDTHECURRENT PRODUCTION POSSIBILITIES CURVE

331 2 3 4 5 6

18

15

12

9

6

3

0


Houses(thousands)

pp2pp1

Economic growth an increase in an

economys total output of goods and services

As shown by the shift from

pp1 topp2, the economy cannow produce more of both

houses and food


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SOURCESOF ECONOMIC GROWTH

Addition of labor and capital

New technology

Invention Innovation

Discovery of new resources

Improvements in productivity

Better educated and more highly skilledlabor force 34


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SCARCITYAND CHOICEINTHE UNITED STATES

The United States has an excellent combination of the

four resources

A skilled, versatile, and mobile labor force

A plentiful supply of land and natural resources

The greatest amount of capital in the world

Thriving entrepreneurial spirit

What about the case in Singapore?

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PROBLEMSOF SCARCITY

Some areas of the world lack the proper ratio of land,

labor, and capital

Some areas are short of capital and technology, natural

resources, or skilled labor

Solutionsinclude:

Increased productivity

Aid to developing nations

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SPECIALIZATIONAND EXCHANGE

Specialization

The process of limiting the scope of an economic unitsproductive efforts instead of trying to produce everything itneeds

What is produced in Brazil, Switzerland, Japan, etc??

Exchange

The process of trading surplus quantities of specializedproducts to others for other goods and services

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ABSOLUTEAND COMPARATIVE ADVANTAGE

Absolute advantage

The ability to produce a good or service using fewer

resources than other producers use

Comparative advantage

The ability to produce a good or service at a lower

opportunity cost than other producers face

Law of comparative advantage The individual, firm, or country with the lowest

opportunity cost of producing a particular good should

specialize in producing that good. 38


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COMPARATIVE ADVANTAGE BETWEEN NATIONS

Before specialization

Cotton Wheat

Country Resource Units Bales Resource Units Bushels

Shetland 3 30 2 60

North Mocha 3 15 2 40

Total 6 45 4 100

After specialization

Shetland 5 50 0

North Mocha 0 5 100

Total 5 50 5 10039

OC for 1 bale cotton:40/10 = 4 bushels of wheat

OC for 1 bale cotton:60/20 = 3 bushels of wheat


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EXCHANGE RATE

The exchange rate of wheat to cotton

will be set by bargaining between the

two countries The final settlement will depend upon

economic circumstances and the

economic strength of the parties

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QUESTIONSTOBE ANSWEREDBYALL ECONOMICSYSTEMS

What goods and services to produce

and in what quantities?

How are goods and services

produced?

Efficient use of productive resources

Who gets what is produced?

How output and income is distributed

among all members of society42


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MARKET ECONOMY

An economy in which the decisionsabout:

what to produce, how much to produce,

and how to allocate goods and services

are made primarily by individuals andfirms in the economy

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THE ROLEOF PROFITINA MARKET ECONOMY

Profit

The incentive for obtaining and using

resources to produce goods and servicesthat consumers will buy

The excess of revenue over all costs of

production

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THE ROLEOF COMPETITIONINA MARKET ECONOMY

Rivalry among individuals and firmsfor sales to consumers

The natural regulator that makes thefree market system work

Businesses compete for shares of the

consumers $Firms compete for scarce productive

resources45


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EFFECTIVE COMPETITION

The economy functions efficiently without an overseer

Consumers are protected from shoddy products and

exorbitant prices

Resource owners and workers are protected against

exploitation by the opportunities of alternative

employment options

Adam Smith call this the invisible hand the

impersonal force of competition ensures the flow ofresources towards the most efficient firms because these

firms can afford to offer the highest prices for their use.46


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THE GUIDING PRINCIPLEOFA MARKET ECONOMY

Privately owned firms should produce

the goods and services consumers

want in the quantities they wish to buy Competition is the mechanism for

regulating trade

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THE ROLEOF PRICESINA MARKET ECONOMY

Prices allocate resources

The use of land, labor, and capital is determined by the total

number of dollars spent on particular goods and services

Prices help determine incomes Purchases of individuals also determine the incomes paid to

the various resources in the form of wages, rents, interest,

and profits

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COMPETITION IN THE SINGAPORE


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COMPETITIONINTHE SINGAPOREECONOMY

Government-regulated markets

Public utilities, public transportation

Mixed economy

Contains a mixture of perfect and

imperfect competition

Contains a mixture of regulated and

unregulated industries49


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ECONOMIC LIBERALISM

An economic philosophy that promoted freedom of actionfor the individual and the firm through the doctrines of: Free trade

Self-interest

Private property Laissez faire

A policy of no government intervention in the economic activitiesof individuals and businesses

Competition

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THE ROLEOF GOVERNMENTINTHE ECONOMY

Government intervention

Necessary to remedy inequities that

developed under economic liberismPrevent monopolies and cartels from

undermining competition

Promotion of common good Deregulation and privatization

Eg deregulation of taxi fares,51


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PRIVATIZATION

The shifting or returning of government economic

functions or services to the private sector of the economy

The underlying rationale is that private enterprise can

provide certain goods and services more efficiently andless expensively than the government

Privatization of public utilities, public housing

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GOALSFORAN ECONOMY

Full employment: 95 to 96% ofcivilian labor force employed

Stable prices: Consumer Price Indexmoves 2% or less in either direction

Economic growth

A balanced budget International balance-of-payments

equilibrium 53


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OTHER ECONOMIC SYSTEMS

Traditional economy

An economy based on self-sufficiency,

with barter as the form of trade

Command economy

An economy in which a central

authority makes most of the economicdecisions regarding production,

distribution, and consumption 54

scarcity and choice notes

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