ECON 2001 Macroeconomic Principles: Scarcity and Trade-offs

• ECON 2001 covers Macroeconomic Principles. This chapter discusses scarcity and trade-offs.

Scarcity

• People never have enough of everything, including time, to satisfy every desire.
• Scarcity arises when a society's resources for producing desired goods are insufficient to satisfy all wants.
• Economics involves making optimal choices under scarcity.
• Scarcity is distinct from a shortage or poverty; it is a fundamental fact of life.

Opportunity Cost, Trade-Offs, and Choices

• Scarcity means that all choices involve trade-offs: acquiring more of one thing necessitates having less of another.
• A common example of a trade-off can be seen in college life.
• Resource allocation decisions involve trade-offs like national defense(guns) versus consumer goods(butter).
• The opportunity cost is the highest-valued, next-best alternative forfeited when a decision is made.
• The opportunity cost of going to college isn't tuition but forgone wages.
• The opportunity cost of watching a football game isn't the ticket price but how you could have spent those hours.
• Engaging in any activity involves trading off the use of that resource for other potential uses.
• Cost in economics always represents a forgone opportunity.
• A graphical analysis of opportunity cost is the production possibilities curve or frontier (PPC or PPF).
• The production possibilities curve or frontier is an economic model illustrating maximum output combinations of 2 goods.

PPC Assumptions

• Only one resource (labor) measured in hours.
• Production of two goods, computers and wheat.
• The economy has 5,000 labor hours each month for production.
• Resources and technology are fixed.

PPC

• Producing 1 computer = 10 labor hours.
• Producing 1 ton of wheat = 1 labor hour.
• Point F (100 computers, 3,000 tons of wheat) requires 4,000 hours of total labor, making it possible but inefficient.
• Point G (300 computers, 3,500 tons of wheat) requires 6,500 hours of total labor, making it unattainable.
• Points on the PPC (like A-E) are possible and efficient, indicating full resource utilization.
• Moving along a PPC requires shifting labor from the production of one good to another.
• Wheat and computers represent each other's opportunity cost in this model.
• A flatter PPC indicates lower opportunity cost for the good on the horizontal axis.
• PPCs can manifest as straight lines or bow shapes.
• PPC is a straight line if the opportunity cost remains constant, Bow-shaped/concave if the opportunity cost of a good rises as more is produced.
• PPC is bow-shaped resources are not perfectly adaptable for alternative uses such as different workers with different skills producing tanks and autos
• A bow-shaped PPC follows the law of increasing opportunity cost.
• The law of diminishing returns is the same as the law of increasing opportunity cost.

Economic Growth, Production Possibilities, and the Trade-Off between Present and Future

• Over time, the PPC can shift due to increases in resources or improvements in technology.
• It becomes possible to have more of everything, which is called "economic growth."
• Alleviating scarcity eventually occurs as the PPC shifts.
• The PPC represents the trade-off between present and future consumption.
  • Consumer/consumption goods: produced for personal satisfaction.
  • Capital goods: are used to produce more or other goods.
• Less consumption today leads to more capital goods, increasing future production capacities.

Comparative Advantage and Maximizing Future Income

• Trade is a solution to scarcity, with self-sufficiency resulting in a low living standard.
• Trade increases productivity.
• Trade allows specialization with the division of labor by segregating resources into specific tasks.
• Comparative advantage is assigned to people with a particular "specific task".
• Gains from trade emerge from comparative advantage

Comparative Advantage

• Comparative advantage differs from absolute advantage.
• Absolute advantage represents the ability to produce a good or service with fewer resource inputs than another producer.
• Nations should specialize based on their comparative advantage to improve economic efficiency and productivity.
• By specializing Output increases and Average standard of living rises.
• Trade increases production possibilities without needing more resources or better technology.
• Trade allows a country to consume beyond its PPC.
• With free trade previously unattainable production is now attainable.

This chapter of ECON 2001 covers the macroeconomic principles related to scarcity and trade-offs. Scarcity arises when resources are insufficient to satisfy all wants, leading to trade-offs where choosing one option means giving up another. The opportunity cost is defined as the value of the next best alternative that is forfeited when a decision is made.