1-1COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

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Economics and Scarcity

• Economics deals primarily with scarcity– How we allocate limited resources to satisfy

unlimited wants and needs

• Resources– Land, labor, factory buildings, timber,

minerals, machinery, and the like– The basis for producing the food, shelter,

medical care, and luxury goods that we want• These resources are scarce in the sense that there

are not enough of them to produce everything we need and desire

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Production Possibilities• In examining production possibilities, we must

make these simplifying assumptions about our economy1. All available resources will be used fully

2. All available resources will be used efficiently

3. The quantity and quality of available resources are not changing during our period of analysis

4. Technology is not changing during our period of analysis

5. We can produce only two goods with our available resources and technology

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Production Possibilities Table

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Production Possibilities Curve

• Shows the maximum amounts of two different goods that can possibly be produced during any particular time period using society’s scarce resources 1-5

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Production Possibilities Curve

• Illustrates– Opportunity cost

• The best alternative that is forgone in order to produce or consume something else

– Unemployment• A situation in which resources are not fully used in

production

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Economic Growth• May occur if the quality or quantity of society’s resources increases, or if new

technologies are developed so that we can produce more output with our available resources

• Reflected in an outward shift of the entire production possibilities curve

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Goods and Services• Services

– Activities such as haircuts, health care, and education that are consumed (used) by consumers

• Goods– Consumer goods

• Consumed (used) by consumers– Capital goods

• Used to produce other goods– Private goods

• Produced by business firms– Public goods

• Provided or paid for by government

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Law of Demand

• Usually stated as follows: price and quantity demanded are negatively related, all other things equal

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Demand Schedule

• A table showing the quantities that consumers are willing to buy at alternative prices during a specified time period

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Demand Curve• A graph showing the quantities that consumers are willing to buy at alternative prices

during a specified time period• The demand curve is downward sloping, reflecting the law of demand

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Law of Supply

• Usually stated as follows: price and quantity supplied are positively related, all other things equal

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Supply Schedule

• A table showing the quantities that suppliers are willing to sell at alternative prices during a specified time period

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Supply Curve• A graph showing the quantities that suppliers are willing to sell at alternative prices

during a specified time period• The supply curve is upward sloping, reflecting the law of supply

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Putting Demand and Supply Together

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Putting Demand and Supply Together (cont.)

• Equilibrium– A state of balance; a point at which quantity demanded equals quantity supplied

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Shortage vs. Surplus

• Shortage– Quantity demanded is greater than quantity

supplied• The price is lower than the market level

• Surplus– Quantity supplied is greater than quantity

demanded• The price is higher than the market level

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Shifts in Demand and Supply

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Shifts in Demand and Supply (cont.)

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Shifts in Demand and Supply (cont.)

• Demand curves shift if:– The number of buyers changes– Consumers’ incomes change– Consumers’ tastes change– The prices of other goods that the consumers

regard as substitutes or complements change

• Supply curves shift if:– The number of sellers changes– The factors that affect the producers’ (sellers’)

costs change

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Real-World Factors That Cause Shifts

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Efficiency and Equity

• Efficient– Using resources in such a way as to maximize

the desired output

• Equity– Fairness

• The market is often efficient, but not necessarily equitable

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Public Goods and Services

• Have unique characteristics that make it unlikely that the market will provide enough of them– Government often provides them

• Most economists agree that the provision of public goods and services is an appropriate role for government– Concerned with just what goods and services

these will be, and how much of them we want

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Spillovers

• Occur when some cost (or benefit) related to production or consumption “spills over” onto people not involved in the production or consumption of the good– Environmental pollution is the most obvious

example of a spillover cost to society– Education provides significant spillover

benefits to society

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Equity

• Issues of equity:– Discrimination– Poverty– Inequality of income distribution– Housing– Health care

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Market Power and Trade

• Market power– Ability to influence market price of a product

• Competition protects us from unreasonable prices– Pure competition

• A market in which many independent producers compete to sell a standardized product to many independent buyers

• International trade enhances competition and reduces market power

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Special Markets

• Markets for some products are often considered too important to be left alone to the marketplace– Housing– Health care– Agriculture– Care of the elderly

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Stability

• Because prices and employment tend to fluctuate, our market economy is inherently unstable

• Inflation– A rise in the average price level in the

economy

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Microeconomics vs. Macroeconomics

• Microeconomics– Deals with individual activity within the

economy• Distribution of income within the country• Nature of individual markets such as agriculture

• Macroeconomics– Deals with the economy as a whole

• Total income• Total output in the economy

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The Economic Left and the Economic Right

• THE ECONOMIC LEFT (Liberal)– The Extreme Left

• Pure Socialism

– Characteristics• Government ownership

of land and capital• Government economic

decision making

– Values• Equity

– Goal• More government in the

economy

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• THE ECONOMIC RIGHT (Conservative)– The Extreme Right

• Pure Capitalism

– Characteristics• Private ownership of

land and capital• Private economic

decision making

– Values• Efficiency

– Goal• Less government in the

economy

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Appendix: Increasing Opportunity Costs

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