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8/13/2019 Scarcity & PPF- Micro economic
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INTRODUCTORYECONOMIC PRINCIPLES
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Two Fundamental EconomicFacts
Society has Unlimited WantsConsumer goods & services are thosethings which satisfy consumer wants
Economic Resources are Limitedresources , inputs or factors of production
things which are used to produce goodsand services
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Types of Resources
Land or Natural ResourcesLaborCapital
capital goods vs. consumer goods
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Scarcity
The two fundamental assumptions implythat goods and services are scarce .Scarcity exists when not everyone canhave all that they want.If a good is scarce then it is:
desirablelimited
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Economic Good vs. Free Good
Economic Good : a good which isscarceFree Good : a good which is not scarce
How can you tell if a good is scarce?
- if it has a PricePrice: the rate at which one goodexchanges for another; a ratio
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If a good has a price ?it is an Economic Good (i.e. it is Scarce)
If it is a Free Good what about Price?its price is zero
Example of a Free Good : Air
Does a zero price its a Free Good? How common is Scarcity ?
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Implications of Scarcity
Scarcity implies Competition.
Scarcity implies that you must chooseamong alternatives.
you cant have your cake and eat it too
theres no such thing as a free lunch
Life is filled with trade-offs.
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Cost (Opportunity Cost)
Highest Valued Foregone Alternative
That is, the cost of action A is:of all of the other actions that you could
have taken (but can not because you
selected A) it is the one that you place
the greatest value upon.
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Examples of Cost
Suppose that you can produce only twogoods, X and Y. What is the cost ofproducing more good X?Suppose that input a is used to producegood Z.
Good Z requires only input a.Input a has no other uses.
What is the cost of producing good Z?
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What is the cost to society of havingnational defense?What is the major cost of youreducation?On June 14, 1994 David Letterman gave2 men tickets to the New York Rangersgame 7 play-offs. What was their costof going to the game?
How to increase the cost to a child ofbuying Nike Air Jordans.Gold Watch
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Conclusions for Cost
Cost and Price are different concepts.Cost refers to an action, not a thing.
Although not every action has a benefit,every action does have a cost.The usefulness of Cost is in its ability topredict behavior.
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Applications of Cost:Comparative Advantage
Consider two individuals, Gilligan andMary Ann, both of whom can either
catch fish or gather coconuts. Let thefollowing table represent the number ofhours that each person requires to
produce one unit of either fish orcoconuts.
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Gilligan Mary Ann
CatchingFish
12 hours 4 hours
GatheringCoconuts
4 hours 2 hours
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Who has the comparative advantage (low cost producer)in producing fish and who has the comparative
advantage in producing coconuts?
Fish: Gilligan: cost of 1 fish is 3 coconuts Mary Ann: cost of 1 fish is 2 coconuts
Coconuts: Gilligan: cost of 1 coconut is 1/3 fish Mary Ann: cost of 1 coconut is 1/2 fish
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Production Possibilities Frontier
The PPF showsvariouscombinations of twogoods (such as Xand Y) that can beproduced.
It separates theattainable regionfrom theunattainable region.
0
2
4
6
8
10
0 2 4 6 8 1 0
Good X
G o o
d Y
PPF
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The very existence of the curve impliesthe scarcity of resources.Where in the attainable region would theeconomy like to be?
Reasons for not being on the boundary: Unemployment : not using all of your resources Underemployment : resources not used to the bestof their ability
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What could cause a shift in theProduction Possibilities Curve?
Change in the amount of resources.
Change in the technology of production.
Example: Consumer Goods vs. CapitalGoods PPF
The very existence of the curve impliesthe scarcity of resources.
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Illustrating coston a Production
PossibilitiesCurve.
0
2
4
6
8
10
Good X
G o o d Y
PPF
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Why is the Production PossibilitiesCurve concave to the origin?
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Law of Increasing Marginal Cost
Marginal Cost is the change in total costfor one more unit ( D TC/ D Q)
The Law of Increasing Marginal Cost says that as you increase output themarginal cost increases .
This is true because inputs are imperfectsubstitutes.
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Specialization
Because inputs are imperfect substitutesthey tend to specialize in production.
Specialization enhances production:It allows resources to do what they do best.Specialization allows repetition and
repetition enhances skills. (The more youdo something, the better at it you become.)
Example: My marriage.
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Guides to Economic Thinking
Test a theory by its predictionsSecondary or indirect effects areimportantScarcity is pervasive and scarcity
Cost
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Principle of Self Interest: people act intheir own interest
decision makers compare cost andbenefits of their actions
Decisions are made at the margin
Information is scarceValue is subjective