Lecture 1 - Scarcity and Choice

8/7/2019 Lecture 1 - Scarcity and Choice

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MODULE NAMEMODULE NAME: ECONOMICS: ECONOMICS

MODULE CODEMODULE CODE: ECON 1101: ECON 1101



LECTURE 1LECTURE 1

THE SOURCE OF ECONOMICTHE SOURCE OF ECONOMICPROBLEM:PROBLEM:

SCARCITY AND CHOICESCARCITY AND CHOICE



ECONOMICSECONOMICS

Economics is the study of how societyEconomics is the study of how societydecides what, how and for whom todecides what, how and for whom to

produce. (Begg & Fisher)produce. (Begg & Fisher)

Human behaviour in the production,Human behaviour in the production,

exchange and use of goods and servicesexchange and use of goods and services



ECONOMICSECONOMICS

Economic problem arise because:Economic problem arise because:

The production that can be obtained by fullyThe production that can be obtained by fully

utilizing all of a nations resources is insufficient utilizing all of a nations resources is insufficient to satisfy all the wants of the nationsto satisfy all the wants of the nationsinhabitantsinhabitants

Because resources are scarce it is necessary toBecause resources are scarce it is necessary tochoose among the alternative uses to whichchoose among the alternative uses to whichthey could be put they could be put



ECONOMICSECONOMICS

The central economic problem is how toThe central economic problem is how toreconcile the conflict between peoplereconcile the conflict between people

wants and desires and the limitedwants and desires and the limitedresourcesresources

Economics explains how scarce resourcesEconomics explains how scarce resourcesare allocated between competing claimsare allocated between competing claimson their useon their use



RESOURCES AND SCARCITY RESOURCES AND SCARCITY

ResourcesResources 4 types4 types

Natural resources: Free gifts of nature such asNatural resources: Free gifts of nature such as

land and foresland and fores Labour: Human resources, mental or physicalLabour: Human resources, mental or physical

Capital: Man made aids to further productionCapital: Man made aids to further productionsuch as tools, machinery and factoriessuch as tools, machinery and factories

Entrepreneurship: One who undertakes tasksEntrepreneurship: One who undertakes tasks==

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION



RESOURCES AND SCARCITY RESOURCES AND SCARCITY

Supplies of resources are sufficient toSupplies of resources are sufficient toproduce only a fraction of the goods andproduce only a fraction of the goods and

services that people desireservices that people desire

Wants are unlimited while resources andWants are unlimited while resources andlimitedlimited

Gives rise to the basic problem of scarcityGives rise to the basic problem of scarcity



CHOICE AND OPPORTUNITY COSTCHOICE AND OPPORTUNITY COST

Choices are necessary because resourcesChoices are necessary because resourcesof scarceof scarce

Having more of one good means havingHaving more of one good means havingless of another goodless of another good

Opportunity cost Opportunity cost



CHOICE AND OPPORTUNITY COSTCHOICE AND OPPORTUNITY COST

The opportunity cost of a good is theThe opportunity cost of a good is thequantity of other goods which must bequantity of other goods which must be

sacrificed to obtain another unit of that sacrificed to obtain another unit of that goodgood

Emphasize the need for choiceEmphasize the need for choice



PRODUCTION POSSIBILITY CURVEPRODUCTION POSSIBILITY CURVE

(PPC)(PPC) Choice and opportunity cost can be betterChoice and opportunity cost can be better

illustrated by the PPCillustrated by the PPC

The PPC shows, for each level of theThe PPC shows, for each level of theoutput of one good, the maximum amount output of one good, the maximum amount of the other good that can be producedof the other good that can be produced

Shows the maximum combinations of Shows the maximum combinations of output that an economy can produceoutput that an economy can produceusing all available resourcesusing all available resources







Quantity of film output is measured on theQuantity of film output is measured on theX axisX axis

Quantity of food output is measured onQuantity of food output is measured onthe Y axisthe Y axis

Any point of the diagram indicates someAny point of the diagram indicates some

amount of each good producedamount of each good produced




PPC separates the attainable combinations suchPPC separates the attainable combinations suchas A, B and C from unattainable combinationas A, B and C from unattainable combinationsuch as Dsuch as D

Negatively sloped because in a fully employedNegatively sloped because in a fully employedeconomy more of one good can be producedeconomy more of one good can be producedonly if resourcesonly if resources

Point A and B represent efficient use of societysPoint A and B represent efficient use of societys

resourcesresources Point C represents inefficient use of resources orPoint C represents inefficient use of resources ora failure to use all resources that are availablea failure to use all resources that are available




PPC illustrates:PPC illustrates:

scarcity: unattainable combinations beyond thescarcity: unattainable combinations beyond the

boundaryboundary Choice: the need to choose among theChoice: the need to choose among theattainable points on the boundaryattainable points on the boundary

Opportunity cost: the negative slope of theOpportunity cost: the negative slope of the

boundary which shows that obtaining more of boundary which shows that obtaining more of one type of output requires having less of theone type of output requires having less of theotherother



QUESTIONQUESTION

There are 5 workers in an economy. EachThere are 5 workers in an economy. Eachworker can produce either 4 cakes or 3 shirts.worker can produce either 4 cakes or 3 shirts.

(i)(i) Draw the economys PPCDraw the economys PPC(ii)(ii) How many cakes could society produce if it How many cakes could society produce if it was willing to do without shirts?was willing to do without shirts?

(iii)(iii) Indicate the points in your diagram that showIndicate the points in your diagram that show

inefficient organization of productioninefficient organization of production(iv)(iv)Indicate those points on your diagram whichIndicate those points on your diagram which

are unattainable and explain whyare unattainable and explain why

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Lecture 1 - Scarcity and Choice