Microecon Chapter Four Notes

Chapter Four: Scarcity and Choice: The Economic Problem Scarcity, Choice, and Opportunity Costs Opportunity Costs: The value of the next best alternative that the decision forces that decision maker to forgo.  Scarcity of physical resources is more fundamental than the scarcity of funds.  Virtually all resources are scarce, meaning that humanity has less of them than we would like.  With limited resources, a decision to have more of one thing is simultaneously a decision to have less of  something else. Opportunity Cost and Money Cost If the market functions well, things that have a high opportunity cost will have a high market cost.   Some items do not bear explicit price tags at all. Ex. College education vs. Working Use of time.  Scarcity and Choice for a Single Firm  Two outputs with only a limited amount of resources  Wheat and soybeans example The Production Possibilities Frontier Production Possibilities Frontier (PPF): Point inside or on the curve are attainable, outside are not within the available resources and technology Always sloped   Slope represents opportunity costs The Principle of Increasing Cost Principle of Increasing Cost: States that as production of one good expands, opportunity cost of producing another unit of this good generally increases.  When a firm concentrates on one commodity, it has to use inputs that were meant for other commodities. Vary proportions. Scarcity and Choice for the Entire Society The position and shape of the production possibilities frontier frontier that constrain society’s choices are determined by  the economy’s physical resources, its skills and technology, its willingness to work, and how much it has devoted in the past for the construction of factories, research, and innovation. Scarcity and Choice Elsewhere in the Economy  Examples are: households, universities, nonprofits, government Application: Economic Growth in the United States and the Asian “Tigers” Economic Growth: When an economy is able to produce more goods and services for each consumer. Consumption Goods: Item that is made for immediate use, doesn’t affect the future of the economy. Capital Goods: Used to produce goods and services in the future. Ex. Factories and machines  Choosing between future needs and current consumption determines how fast the economy grows  Faster growth equals expanding curve  An economy grows by giving up some current consumption and producing capital goods for the future instead. More capital equals the faster its production possibilities frontier will shift outward over time.

The Concept of Efficiency Efficiency: Absence of waste, max outputs  Unemployment creates waste  Assigning inputs to wrong task = Inefficient

The Three Coordination Tasks of Any Economy Allocation of Resources: Refers to the society’s decisions on how to divide up its scarce input resources among the different outputs produced in the economy and among the different firms or other organizations that produce those outputs. 1. Utilize resources efficiently 2. Combination of goods to produce 3. Distribution Distribution to people  How, What, and Whom?  We automatically and anonymously make decisions with money The Wonders of the Division of Labor Division of Labor: Smaller, specialized tasks. The Amazing Principle of Comparative Advantage Comparative Advantage: Producing more effectively than others.  Do what you do best and trade  Leave simpler tasks to others  Law of Comparative Advantage – Advantage  – David Ricardo Specialization Leads to Exchange  Mutual gains from voluntary exchange  Money works better than just trade  Specialization and exchange equals better lives Market Prices, and the Three Coordinate Tasks Market system harnesses self interest   Inputs are expensive, so people try to be efficient What does the market do well?   What does the market do poorly?