Microeconomics

• Scarcity (also called paucity) is the fundamental

economic problem of having seemingly unlimited
human wants in a world of limited resources. It
states that society has insufficient productive
resources to fulfill all human wants and needs.
– Kıtlık
Scarcity ... the fundamental problem of economics
Resources are limited ... wants are not

White Sands, New Mexico in the1950s, during a water shortage

photo from National Park Service
Projected water scarcity
(R. Svadlenka, "The emerging water crisis")

Color codes:
Green => "little or no scarcity"
Red => "Physical water scarcity"
Orange => "Economic scarcity"

In economics, ALL COUNTRIES face economic scarcity

This photo illustrated an article on water scarcity on the
island of Corfu (Greece).

No physical scarcity of water ... but no USABLE water.

Scarcity is always relative to human wants, hence it is

always with us.
Resources are limited; wants are unlimited

Scarcity = not enough resources to produce the goods to satisfy

our wants.

Resources: Adam Smith in his Wealth of Nations (1776)

divided resources into land, labor and capital.

http://www.adamsmith.org/smith/won-intro.htm
Adam Smith’s 3 resources: Land, Labor and Capital

1. LAND: used as shorthand for any natural resource,

not simply for agricultural land.

2. LABOR: manual power + skill ("human capital")

3. CAPITAL: produced means of production

for example, hammers, drill presses, computers ...
or even flint arrowheads of American Indians,
which Smith used as an example.

Although money is used to BUY all the above,

money is not itself a productive resource.

Capital grows through investment – and requires

foregoing current consumption. The Indian must take time
away from gathering berries to make the arrowheads.
Identify the resources:

Buena Vista Farm, Kern County, CA, around 1885

(Library of Congress)
Identify the resources:

Barthelemy L'Anglais, Le Livre des Proprietes des Choses

15th century. Bibliotheque Nationale, France.
Identify the resources: land, labor, capital

Trawling for shrimp (NOAA website)

Identify the resources: land, labor, capital

Gathering coal from a slag heap, Nanty Glo, 1937

(Photo by Ben Shahn, Library of Congress website)
Identify the resources: land, labor, capital

Electric furnace, Allegheny Ludlum (1941)

 Scarcity means that choices are
necessary.
When you can’t have all you want of
everything, you must make choices.

Microeconomics is the study of how to make

the best possible ( or the optimal) choice
under the constraint of limited resources.
 Choices always involve tradeoffs

Because of the scarcity of resources, we can have more

of one thing only if we are willing to do with less of
another.

The tradeoffs are very evident in wartime –

the following slide shows Cadillacs from 1944 and
1946.

The productive resources in the lower pictures could be

used to make either tanks or cars.
Cadillacs ... 1944 and 1946
Opportunity cost of tank = 10 passenger autos

M5 Tank Cadillac Coupe

 Tradeoffs and the Production
Possibility Frontier
Economists would want to develop a more precise
model of the tradeoffs involved –

And that model can be represented graphically by

a “Production Possibility Frontier”, showing the
choices which are
-- possible (on or within the frontier)
-- efficient (exactly on the frontier)
-- inefficient (within the frontier)
-- impossible (beyond the frontier)
 M5 tanks
The tank-auto trade-off:
an economist's view using the

Production Possibility Frontier

500

Autos

5,000
 M5 tanks
The tank-auto PPF:
one POSSIBLE point is
(2000 autos, 300 tanks)
500

another POSSIBLE point

is
300 (4000 autos, 100 tanks)

Autos

2,000 5,000
 M5 tanks
The tank-auto PPF:

an IMPOSSIBLE point is
(4000 autos, 300 tanks)
500

300

Autos

4,000 5,000
 M5 tanks

500

200

an INEFFICIENT point is
(1000 autos, 200 tanks) Autos

1,000 5,000
 M5 tanks
The tank-auto equation:
TANKS = 500 – 0.1 AUTOS
Check out a few values:
500 AUTOS TANKS
0 500
1000 400
2000 300
2001 299.9

Autos

5,000
 M5 tanks Equation in general form:

TANKS = a + b AUTOS

500 How to find the equation from the graph:

1. a = Y-INTERCEPT = 500

2. b = SLOPE = rise over run

= - 500 divided by 5000 = - 0.1

Autos

5,000
 What the intercept means:
M5 tanks
TANKS = 500 – 0.1 AUTOS

500 IF we produced zero autos, we could produce up to

500 tanks, since

TANKS = 500 – 0.1 (0) = 500

Autos

5,000
 What happens when the intercept changes:
M5 tanks
TANKS = 600 – 0.1 AUTOS

IF we produced zero autos, we could produce up to

600 tanks, since
600
TANKS = 600 – 0.1 (0) = 600

The PPF would shift OUT and parallel to itself.

500
This might be due to an increase
in the resources available for
production – for example, an
increase in the labor force, and a
new assembly line in the factory

Autos

5,000
6000
 What the slope means:
M5 tanks
TANKS = 500 – 0.1 AUTOS

IF we were producing 2000 autos and 300 tanks

500 and if we decided to produce one more auto, we
would have to reduce tank production to 299.9

The OPPORTUNITY COST of an auto is

one-tenth of a tank.

Autos

5,000
 What happens when the slope changes:
M5 tanks
TANKS = 500 – 0.05 AUTOS
If autos = 0, TANKS = 500
If autos = 5,000, TANKS = 250
500 If autos = 10,000, TANKS = 0

The possibility exists of producing more autos –

perhaps some way of producing auto transmissions
(but NOT tank transmissions) more rapidly has
been discovered.

Autos

5000 10,000
 Costs and benefits
The Production Possibility Frontier shows us
the economically efficient possibilities, but
does not help us choose among them.

To choose, we must weigh costs and

benefits:

take an action (move along the PPF)

if and only if the EXTRA benefits of the
action are at least as great as the EXTRA
costs.
Scarcity and use of time

Exercise: Draw PPF for

1.Studying/Partying
2. Studying/Working
Think about intercepts,
actual point chosen.
 Opportunity cost
Consider the last slide:

1. What is the opportunity cost of

studying?

2. What is the opportunity cost of working?

3. Why do rational people make different

choices?