Copyright ©2006 by Thomson South-Western. All rights reserved.

Contemporary Economics:An Applications ApproachBy Robert J. Carbaugh

Chapter 1:

Scarcity and Choice

Carbaugh, Chap. 1 2

Opportunity cost and choice

Scarcity and Opportunity Cost

Nu

mb

er o

f co

mp

acts

Number of minivans

D

C

B

A

E

Car-wash possibilities

0

20

40

60

80

0 10 20 30 40

Carbaugh, Chap. 1 3

Production possibilities curve

Opportunity Cost

Possible combinations of computers and VCRs

Computers (millions)

A

B

C

D

Production possibilities curve (PPC)

Points along PPC imply no unemployed resources and efficient production

Attainable and unattainable production

combinations

Computers (millions)

A

B

C

D

Production possibilities curve (PPC)

Inefficient

UnattainableF

E

Foregone output

0

1

2

3

4

5

6

0 1 2 3

VCRs (millions)

0

1

2

3

4

5

6

0 1 2 3

VCRs (millions)

Carbaugh, Chap. 1 4

Law of increasing opportunity cost

Opportunity Cost

Computers (millions) A

B

C

D

A bowed outward PPC illustrates increasing opportunity costs

0

1

2

3

4

5

6

0 1 2 3

VCRs (millions)

Carbaugh, Chap. 1 5

Changes in the PPC

Economic growth on the PPC

Computers (millions)

G

F

C

EEconomic growth is illustrated by an outward shift in a nation’s PPC

PPC1

PPC0

0

3

0 2

VCRs (millions)

Carbaugh, Chap. 1 6

Economic growth in U.S. and JapanUnited States

Consumer goods (hamburgers)

Economic Growth

A

Next year's production possibilities

This year'sproduction possibilities

PPC1

PPC0

The U.S. choice to produce more consumer goods (point A) limits future production growth

JapanConsumer goods (hamburgers)

A´

Next year's production possibilities

This year'sproduction possibilities

PPC1

PPC0

Japan's choice to favor capital goods (point A) will shift its future PPC farther out

Capital Goods (machinery) Capital Goods (machinery)

Carbaugh, Chap. 1 7

Opportunity cost of national security

Economic Growth

Security Goods

F

PPC0 PPC1

G

E

Nonsecurity Goods

Carbaugh, Chap. 1 8

Economic sanctions

Economic Growth

IraqMachines

A

(before sanctions)

(after sanctions)

PPC1

PPC0

Oil (barrels)

Carbaugh, Chap. 1 9

Revised grading standard

Shifting relationshipsInitial grading standard

Reading Tables & Graphs

Hours of study time per week Hours of study time per week

GPA

Higher grading standard

GPA

H

J

I

K

Run = 2

Rise = 1

Lower grading standard

0

1.0

2.0

3.0

4.0

0 2 4 6 80

1.0

2.0

3.0

4.0

0 2 4 6 8

Carbaugh, Chap. 1 10

Fundamental economic questions

Economic Systems

Scarcity

Fundamental economic questions:- What to produce?- How to produce?- For whom to produce?

Type of economic system:- Market economy- Command economy- Mixed economy

Imposes

Answered by

Carbaugh, Chap. 1 11

Economic Systems

Market economy: circular flow model

Resource markets

Product markets

Business firms

Land, labor, capital and

entrepreneurship

Rent, wages, interest and profits

Households

Consumption expenditures

Goods and services