One regionconsisting of points on the ppf and below

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: by point F, which lies beyond the PPF. Can you see then that the PPF itself (the actual curve) illustrates scarcity by creating two regions for us? One region—consisting of points on the PPF and below it—represents what is available to us. Another region (the points beyond the PPF) represents what is unavailable to us. Scarcity told us we couldn’t have everything we want, and the PPF makes this point visually clear. Choices and the PPF Now consider the concept of choice. We stated earlier that because of scarcity we must make choices. Looking again at Exhibit 1-2(b), we know we cannot be at points A–D at the same time. We must make a choice. Is it going to be A or B or C or D? Once we make a choice, opportunity cost “pops up.” For example, suppose we narrowed our choices down to points B and C, and in the end chose point C. What is the opportunity cost of a set of skis over this range? Well, we know that we produce 20,000 more sets of skis by choosing point C over B, but at the opportunity cost of producing 15,000 fewer snowboards. In other words, the opportunity cost of 20,000 more sets of skis is 15,000 snowboards. A Consequence of Scarcity: The Need for a Rationing Device Because scarcity exists, we need a rationing device, some way to decide who gets what portion of all the resources and goods available. What is the most common way in our society to determine who gets which goods, and how much each person gets? If you guessed “money,” you were on the right track. Price (a certain number of dollars) is the most widely used rationing device in our society. If you are willing and able to pay the price “ There’s no such thing for something, it is yours. If you as a free lunch.” are either unwilling or unable —Milton Friedman, economist to pay the price, it won’t be yours. In this way, by using price, all products are rationed out to the people who are willing and able to pay. If scarcity did not exist, a rationing device would not be necessary. Everyone would get everything he or she wanted. Another Consequence of Scarcity: Competition Today’s world is very competitive. People compete for jobs, companies compete for profits, and students compete for grades. Economists believe that competition exists because of scarcity. If enough resources were available to satisfy all of our wants, people would not have to compete for the limited resources. Economists also believe that competition takes the form of people trying to get more of the rationing device. If (money or dollar) price is the rationing device, people will compete to earn dollars. People compete to earn dollars every day. Say three people are up for the same promotion at their business firm. Why do they want the promotion? Certainly added prestige and responsibility may be part of the answer, but still people are more likely to seek and accept promotions that come with more money. Suppose something other than price— muscular strength, for example—were used as the rationing device. People with more muscular strength would receive more resources and goods than people with less muscular strength. In this situation, an economist would predict that people would compete for muscular strength and would lift weights each day. The lesson is simple: whatever the rationing device, people will compete for it. See Exhibit 1-3 for a summary of the concepts described in this section. rationing device A means for deciding who gets what portion of the available resources and goods. Section 1 The Foundation of Economics 11 01 (002-029) EMC Chap 01 EXHI BIT 1-3 11/17/05 4:03 PM Page 12 Economic Facts of Life SCARCITY Combination of limited resources and unlimited wants Scarcity creates the need for a rationing device. People compete for the rationing device. Due to scarcity, people must make choices. When people make choices, they incur opportunity costs. Changes in opportunity cost cause changes in behavior. The science of economics probably would not exist were it not for scarcity—an economic fact of life. A Definition of Economics economics The science that studies the choices of people trying to satisfy their wants in a world of scarcity. In this section, you learned about three important and closely related economic concepts: scarcity, choice, and opportunity costs. You also learned something about the way economists think about the world (and you will learn more in the next section). So, Defining Terms 1. Define the following terms: a. scarcity b. opportunity cost c. economics d. want e. resource f. production possibilities frontier g. rationing device Reviewing Facts and Concepts 2. Because scarcity exists, people must make choices. Explain why. 3. Give an example to illustrate how a person may incur an opportunity cost 12 Chapter 1 What Is Economics? now it’s time for a formal definition of the term. Economics is the science that studies the choices people make as they try to satisfy their wants in a world of scarcity. Put another way, you could say that economics is the study of how people use their lim...
View Full Document

This document was uploaded on 01/16/2014.

Ask a homework question - tutors are online