Unformatted text preview: CHAPTER 2
And Chapter 18: pp. 458-469 THE BASIC
SCARCITY Spring, 2011
1 SCARCITY REQUIRES TWO TYPES
Production choices: What to produce?
What How to produce?
Distribution For whom?
Choices require sacrifice or cost
Choices Termed “opportunity” costs
Termed Opportunity costs may be constant,
or increasing. 2 CHOICES ILLUSTRATED
Assumptions: Fixed resources
Fixed Full employment
Full Maximum efficiency Given level of technology
Textbook example (P. 36)
Textbook Military goods versus consumer
goods 3 INCREASING OPPORTUNITY
COSTS OF PRODUCTION, P.
36 Identify attainable, non-attainable
points, and opportunity costs Figure 2.1 DIFFERENTIAL RESOURCE
COSTS High quality land: 1 acre
High 60 wheat or 30 corn
So 1 wheat costs ½ corn.
And 1 corn costs 2 wheat Low quality land: 1 acre 40 wheat or 10 corn.
So 1 wheat costs ¼ corn.
And 1 corn costs 4 wheat WHAT DOES THE PRODUCTION
POSSIBLITIES SCHEDULE LOOK LIKE
FOR BOTH PIECES OF LAND TAKEN
5 DIFFERENTIAL RESOURCE
COSTS: P. 2
COSTS: WHEAT PRODUCTION:
WHEAT 60 wheat from high quality land.
40 wheat from low quality land.
100 is total from all land
But no corn is produced if all
land is in wheat
land CORN PRODUCTION
CORN 30 corn from high quality land.
10 corn from low quality land.
40 is total from all land.
But no wheat is produced if all
land in corn. 6 DIFFERENTIAL RESOURCE
WHEAT Slope = -2/1 100 Slope = -4/1
40 30 40 CORN Note that differential opportunity costs
leads to “bowed out” shape of PPC.
This is because opportunity costs differ
among economic resources.
7 ECONOMIC GROWTH Economic growth
Economic Increased number of resources
E.g. population growth Increased quality of resources
E.g., training and education Technological change E.g., research and development See Exhibit 3, page 41
8 CONSUMPTION VS.
INVESTMENT CHOICES AND
ECONOMIC Consumption goods are consumed or
used up in the year in which they are
produced Satisfy immediate wants are needs Investment goods are durable.
Investment Raise productive capacity in the
future 9 ALPHA’S AND BETA’S
PRESENT AND FUTURE
POSSIBILITIES, P. 42
POSSIBILITIES, Figure 2.4 Constant Opportunity Costs of
50 Right Shoes 50
11 PRODUCTION POSSIBILITIES
TRADE (text: pp. 461-464)
TRADE Constant (but different) opportunity
costs in each country
costs Purpose of example: Demonstrate basis of trade
Demonstrate Demonstrate gains from trade
Demonstrate Potential costs of international
specialization Reallocation problems
Reallocation Income distribution issues The interdependence issue 12 INTERNATIONAL
Before Trade In isolation before trade:
U.S. : 100 Grain or 50 Steel
Japan: 40 Grain or 40 Steel
Japan: Opportunity costs of Steel: U.S.
1 Steel = 2 Grain
U.S. Japan: 1 Steel = 1 Grain
Japan: Opportunity costs of Grain:
1 Grain = 1/2 Steel
1Grain = 1 Steel 13 U.S. Production
Grain 100 U.S. pretrade 20
60 Grain 60 20 steel 50
14 Japan Production
10 Steel and 30
30 10 40 steel
15 SPECIALIZATION Total World Output in Isolation
Total U.S. : 60 Grain and 20 Steel
Japan: 30 Grain and 10 Steel
Total world output:
60 + 30 = 90 Grain
20 + 10 = 30 Steel
20 Total World Output With Specialization: U.S. Produces100 Grain Japan produces 40 Steel
Japan 16 SPECIALIZATION AND
TRADE: OUTSIDE LIMITS
TO THE TERMS OF TRADE
TO U.S. produces grain and wants steel. U.S. can get each steel in
isolation by giving up 2 grain. So
U.S. wants to pay less than 2
grain for each steel. Japan produces steel and wants
grain. Japan can get each grain in
isolation by giving up 1 steel. So
Japan wants receive more than 1
grain for each steel.
17 OUTSIDE LIMITS TO TERMS OF
TRADE Japan produces Steel:
Japan 1 Steel must be worth > 1 grain
for Japan to trade
US. Produces Grain:
US. 1 Steel must be worth < 2 grain
for U.S. to trade 18 WILL BOTH
BETTER OFF WITH
TRADE? Assume 1 steel = 1.5 grain
Assume United States:
United In isolation: 20 steel & 60 grain
In With trade: 20 steel & 70 grain
Japan: In isolation: 10 steel & 30 grain
In With Trade: 20 steel & 30 grain 19 U.S. Production
Grain 100 Slope = 1 steel
=1.5 grain U.S. pretrade 20
steel and 60
Grain Steel 50
20 Japan Production
Grain 40 Slope = 1 Steel
= 1.5 grain
Japan Pretrade 10 Steel
and 30 Grain steel 40
21 SO WHY IS THERE
RESISTENCE TO FREE
INTERNATIONAL Distributional problems
Distributional Adjustment problems
Adjustment National defense arguments. Infant industry arguments.
Infant Free trade vs. “fair” trade.
Free Can comparative advantages be Created by government
22 CHAPTER 2 HIGHLIGHTS
8. Concept of PPC & the basic
economic problem: scarcity
Slope of PPC: opportunity
Production inside PPC:
unemployment or underunemployment
Shifts of PPC: economic
PPC limits consumption w/o
specialization & trade
Specialization & trade: based
on comparing opportunity
Benefits of specializ. &trade
Costs of trade specializ. &
23 QUESTIONS???? 24
View Full Document