managing scarce resources [email protected]. objectives to be able to describe the economic...
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Managing Scarce Resources
Objectives
• To be able to describe The Economic Problem
• To understand the factors of production as economic resources
• To be able to explain the concept of opportunity cost
What is Economics About?
• Wants and needs• Scarcity• Choice• Opportunity Cost
The worlds resources are scarce but human wants are infinite so choices have to be made about
What to produce
Who to produce it for
How to produce it
This is known as the Economic Problem
The science of Economics involves advising how best to use scarce resources to make goods and services to satisfy as many wants as possible
The Economic ProblemWhat goods and services should an economy produce? Should the emphasis be on agriculture, manufacturing or services? Should it be on sport and leisure or housing? How should goods and services be produced? Labour, land or capital intensive? Efficiency?Who should get the resources that the economy has produced? Even distribution, more for the rich? More for those who work hard?Free or planned economic systems?
• The Economic Problem thus the study of Economics would not exist if
• Resources were infinite • Human wants were limited
Conflicts of Interest
• If scarce resources are used in one way they cannot be used in another way
• Example building a road may satisfy people commuting to work, but using land for this purpose means it cannot be used in another way, for example as farmland. This does not satisfy the wants of farmers and nature lovers
Value Judgements
• Opinions of what is ‘good’, ‘bad’, ‘right’ or ‘wrong’
• Normative statementsEg. ‘The UK should join the single
currency’
• Words that indicate a value judgement….
• Statements that can be proved against facts are called positive statements
• Eg. ‘There are over 4 million people unemployed’ can be tested against fact
Task• Positive or Normative Statement?1. Prices are on average rising by 10% a year2. Wealth should be more equally distributed3. A tax on wealth would reduce differences in people’s
wealth4. Old age pensions ought to be increased5. An increase in pensions would cause an increase in
spending in the economy6. An increase in taxation on petrol will reduce the quantity
of petrol sold7. If wages were lower firms would employ more workers8. Using scarce resources involves an opportunity cost9. We should use fewer resources today so that we will have
some left for the future
Opportunity Cost
• Making choices involves going without something else
• Opportunity cost is the next best alternative forgone when an economic decision is made (learn definition and use)
• It is the true cost of a decision as it represents what has been sacrificed
Questions
• What is the opportunity cost of– You studying IB Economics– Buying an Economics textbook– Spending an hour doing your Economics
homework
More detail on the economic problem…
Free and Economic Goods
• Most products are economic or scarce goods as limited resources have been used to make them
• Free goods do not require scarce resources to make eg. Sunlight– Do not confuse with goods such as the NHS
where patients do not have to pay for treatment- scarce resources were needed to provide this service
The Economic Problem
Land
Labour
Capital
Enterprise
Finite resources
Infinite wants
ChoicesWhat, how, for whom?
Economic Resources
Land- All natural resources that can be
used to produce goods and services. (Incl. forests, fish, oil)
Labour- All human effort, physical and mental
used in the production of goods and services
Capital- Capital goods: man-made goods that are
used to produce other goods and services eg. Factories, offices, warehouses, railways etc.
Capital goods (also known as Producer goods) are distinct from Consumer goods
Note- in economics Capital is not shares, bank accounts etc (these are financial assets). Capital is physical assets
Enterprise- The entrepreneur takes risks and organises
the other economic resources
Issues with the factors of production
• What might affect a country’s choice in what to produce?
-Land-Labour-Capital-Enterprise
Note
• Economists have to assume consumers act rationally hence that consumers spend their scarce resources in a way that will maximise the benefit (utility) that they gain from their expenditure
• Consumers are considered to be utility maximisers
Production Possibility Curves
• Analytical tools to show the concepts of scarcity, choice and opportunity cost
• Show the maximum output of a combination of two types of product that can be produced with current resources and technology
• Production Possibility Frontiers, Opportunity Cost Curve (PPCs, PPFs)
D and E are unattainableB and C are attainable but means there is unemployment or underemployment of some resources (inefficiencies)
Cap
ital G
ood
s
Consumer Goods
PPC1
A
B
C
E
D
Scarcity of economic resources limits output to points on or below the PPC
When an economy is producing on its PPC it is working to it’s full capacity and making full use of it’s economic resources.
Such a point is described as productively efficient
Economy ZC
ap
ital G
ood
s (K
) m
illio
ns
of
tonn
es
Consumer Goods (C) (millions of tonnes)
10
30
70
PPC1
10 5030
50
0
A
Point A= 30m K, 50m CMove to B to gain 10m C ‘costs’ 30m KThus the opportunity cost of 1m tonnes of consumer goods is 3m tonnes of capital goods
B
Cap
ital G
ood
s
Consumer Goods
Economy ZAt point A Economy Z can produce x1 of Consumer goods and y1 of Capital goods
y1
y2
x1x2
A
B
PPC1
To increase output of capital goods from y1 to y2, x1-x2 of consumer goods must be sacrificed
Hence PPCs can be used to demonstrate opportunity cost
Cap
ital G
ood
s
Consumer Goods
y1
x1 x2
Shifts in PPCs
PPC2
PPC1
A B
Over time most countries’ productive capacity increases- quantity and quality of resources increases, better educated and trained workforce and the quantity of capital goods increases
Cap
ital G
ood
s
Consumer Goods
PPC2
PPC1
AB
Actual and Potential Economic Growth
C
A to B and A to C are Actual Economic growth (an increase in output)
PPC1 to PPC2 represent potential economic growth (an increase in a country’s potential capacity)
In the UK in 2001 the cull of cows, sheep and pigs to fight the outbreak of foot and mouth disease reduced the country’s ability to produce agricultural products
If there is a change in the quantity or quality of resources that are specific to the production of one type of product, the slope of the PPC will change
Agricultural Products
Man
ufa
ctu
red
Good
s
PPC1
PPC2
Quick Quiz Tues 18th Sept
1. What is the ‘economic problem’ (3 marks)
2. What is meant by a ‘normative statement’? Give an example (2 marks)
3. What are the 4 factors of production? Give an example of each (8 marks)
4. Define opportunity cost (2 marks)
More on PPCs…
Notes on PPCs
• Most PPCs curve outwards from the origin• This shows that as more of one product is
produced, the opportunity cost of extra units of it increases (diminishing returns)
• This is because some resources are better suited to making one type of good
• In a few cases where economic resources are equally good at producing both types of products, the opportunity cost will be constant, hence the PPC will be a straight downward sloping line
Economy ZC
ap
ital G
ood
s
Consumer Goods (millions)
10
30
70
PPC1
10 5030
50
0
A
Point A= 30m K, 50m CMove to B to gain 10m C ‘costs’ 30m K
At point C however, to gain 10m C we only have to sacrifice 1m K
Thus the opportunity cost changes along the curve
B
C
• Handout• The shape of the PPC