confronting scarcity
TRANSCRIPT
Confronting Scarcity: Choices in Production
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“The first lesson of economics is scarcity – there is never enough of anything to fully satisfy all those who want it. The first lesson of politics
is to disregard the first lesson of economics.”-Thomas Sowell
Scarcity…a real bummer.
In the previous module, we learned that we face scarcity…but why?
Because the “stuff” we use to make goods and services are scarce.
And by “stuff”, we mean the ‘factors of production’.
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So what items are scare?
• Labor– For example. there are about 150 million workers in the
U.S. That may seem like a lot but it is a finite limit.
• Natural resources– The U.S. contains about 10 million sq km of land…again
a lot, but still limited.
• Capital– A fancy name for equipment, money or other items used
in production…it too is limited.
Resources used to make goods and
services are scarce.
There are three of these resources including:
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There is a fourth factor too
Entrepreneurial Ability
Ideas are also scarce. I wish I had more of them and I bet you do too!
The fourth factor may be the most important.
It is the idea…the spark…that combines the other three factors of production into something that
is useful.
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Economics, in a nut shell
Because these resources are scarce,
there are not enough of them to satisfy all of our
wants and needs.
That means we have to make choices, both as individuals and
as a society.
Economics is the study of those choices – It analyzes how we decide to use our
scarce resources.
Here we are seeing several Key Learning Outcomes. We now see that resources (such as land, labor,
capital and entrepreneurial ability)
are scarce and because of that we
have to make choices based on opportunity
cost!
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Because of scarcity, we have to make choices
In the last module, we developed a model to analyze these choices for an individual.
Let’s turn our attention to these choices from a societal
perspective.
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The economizing problem, from society’s point of view
We’ll now develop a model to explore choices from a societal perspective.
That model is called the Production Possibility Model.
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Let’s turn to society’s choices
In exploring the Production Possibility Model, well discuss choices between two goods: Guns and Butter.
Guns might represent spending on defense. You do want to protected, don’t you?
Economists love to use these as examples because they represent something bigger.
Butter might represent spending on welfare programs. You do
want to happy, don’t you?
Societies routinely have to make choices between these two important goods!
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The Production Possibilities Model can be used to analyze these choices
• We are discussing a hypothetical country• Fixed resources
– The supply of resources in that country (i.e. factors of production) used is limited in both quality and quantity
• Fixed technology– Technology in that country does not change
• Two good model– There are only two goods in the world (Ridiculous, I know but it keeps
things simple.)– Let’s call them “Guns and Butter”
To set up the Production Possibilities Model, let’s make some assumptions
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…Now for the model
Assume we are talking about a hypothetical country that can produce only two goods: Guns and butter.
Here are the production alternatives that they may face:
If this country makes nothing but butter, it can produce 20 units.
If this country makes nothing but guns, it can produce 4 units.
Or it, can produce some combination of
the two.
Note how these alternatives look like XY coordinates.
We can graph them!.
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The production possibility curve (or frontier)
Here we see this country’s
production alternatives displayed
graphically.
They, as a society, can choose to produce any
combination of guns and butter up
to points on this line.
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The production possibility curve (or frontier)
Any point inside the PPC means that resources are
unemployed.
When we hear “unemployment”, we think
of labor. But this could mean any resource.
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We can explore Opportunity Cost from society’s perspective too
Recall, opportunity cost is the most desired goods or services that are
forgone in order to obtain something else.
In this model, its the amount of one good that must be sacrificed to make one unit of another good.
In other words, “what does it cost to make a gun, in terms
of butter.”
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Let’s do the mathNotice…if you start at ‘A’ and want to add 1 gun you must
give up 2 butter
But in order to add another gun, you must give up 4
butter!
Study this pattern. I think you’ll see that each time you
add another good, its opportunity cost gets higher!
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Notice, each additional unit costs more!
This illustrates the Law of Increasing Opportunity Cost
The more of a product that is produced, the greater is its
opportunity cost
This holds true in reality too.
As we continue to plant in increasingly less fertile soil, crops
will not be as bountiful.
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But over time, can’t we make more? YES
Over time, we might expect a country’s Production
Possibility curve to expand.
That means that people can have more of both guns and
butter.
Here, the burdens of scarcity have been reduced.
These shifts could result from:
-Technological improvements
-Population growth or other resource growth (e.g. land)
-Improvements in productivity or efficiency
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Real world example: factors that affect the Production Possibility Curve
As a country’s population grows, your production possibility curve will likely increase (or shift out).
Most…but not all…countries experience population growth.
Here we see the U.S. population is growing by about 1% per year.
Some countries like Japan and Russia have been experiencing population declines. That does
not bode well for future economic growth!
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Current choices also affect the Production Possibility Curve
To start, note that we have new goods on these axis.
On the Y-Axis we have Capital Goods –those that are used to
make other things.
On the X-Axis we have Consumer Goods –those that are used right
away.
Imagine we have two countries that are the same in every aspect
expect they choose different points on their Production
Possibility Curves.
Country A chooses to make a lot of consumer goods.
Country B chooses to make a lot of capital goods.
Which will grow more quickly?Hopefully, you chose B. With more capital goods, it’s ability to produce more in the future will
increase and their PPC will shift out to reflect that!
This is an application of a Key Learning Outcome: Resources are scarce therefore individuals and society must make choices
based on opportunity costs…it is the economizing problem!
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In summary
Individuals and countries face scarcity and must make decisions on how to allocate their scarce resources.
These decisions require sacrifices of other things, referred to as opportunity costs.
Over time, our incomes, populations, and technologies might expand, which will
lessen the burden of scarcity.
Economics is the study of these decisions!
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