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 Economics and Scarcity
• Economics deals primarily with scarcity
– How we allocate limited resources to satisfy
unlimited wants and needs
• Resources
– Land, labor, factory buildings, timber,
minerals, machinery, and the like
– The basis for producing the food, shelter,
medical care, and luxury goods that we want
• These resources are scarce in the sense that there
are not enough of them to produce everything we
need and desire
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 Production Possibilities
• In examining production possibilities, we must
make these simplifying assumptions about our
economy
1. All available resources will be used fully
2. All available resources will be used efficiently
3. The quantity and quality of available resources are
not changing during our period of analysis
4. Technology is not changing during our period of
analysis
5. We can produce only two goods with our available
resources and technology

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Production Possibilities Table

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 Production Possibilities Curve

• Shows the maximum amounts of two different goods that can possibly be produced
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 Production Possibilities Curve
• Illustrates
– Opportunity cost
• The best alternative that is forgone in order to
produce or consume something else
– Unemployment
• A situation in which resources are not fully used in
production

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 Economic Growth
• May occur if the quality or quantity of society’s resources increases, or if new
technologies are developed so that we can produce more output with our available
resources
• Reflected in an outward shift of the entire production possibilities curve

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 Goods and Services
• Services
– Activities such as haircuts, health care, and education
that are consumed (used) by consumers

• Goods
– Consumer goods
• Consumed (used) by consumers
– Capital goods
• Used to produce other goods
– Private goods
• Produced by business firms
– Public goods
• Provided or paid for by government

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 Law of Demand
• Usually stated as follows: price and
quantity demanded are negatively related,
all other things equal

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 Demand Schedule
• A table showing the quantities that
consumers are willing to buy at alternative
prices during a specified time period

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 Demand Curve
• A graph showing the quantities that consumers are willing to buy at alternative prices
during a specified time period
• The demand curve is downward sloping, reflecting the law of demand

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 Law of Supply
• Usually stated as follows: price and
quantity supplied are positively related, all
other things equal

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 Supply Schedule
• A table showing the quantities that
suppliers are willing to sell at alternative
prices during a specified time period

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 Supply Curve
• A graph showing the quantities that suppliers are willing to sell at alternative prices
during a specified time period
• The supply curve is upward sloping, reflecting the law of supply

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Putting Demand and Supply Together

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 Putting Demand and Supply Together (cont.)
• Equilibrium
– A state of balance; a point at which quantity demanded equals quantity supplied

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 Shortage vs. Surplus
• Shortage
– Quantity demanded is greater than quantity
supplied
• The price is lower than the market level

• Surplus
– Quantity supplied is greater than quantity
demanded
• The price is higher than the market level

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Shifts in Demand and Supply

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Shifts in Demand and Supply (cont.)

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Shifts in Demand and Supply (cont.)
• Demand curves shift if:
– The number of buyers changes
– Consumers’ incomes change
– Consumers’ tastes change
– The prices of other goods that the consumers
regard as substitutes or complements change
• Supply curves shift if:
– The number of sellers changes
– The factors that affect the producers’ (sellers’)
costs change
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Real-World Factors That Cause Shifts

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 Efficiency and Equity
• Efficient
– Using resources in such a way as to maximize
the desired output
• Equity
– Fairness

• The market is often efficient, but not

necessarily equitable

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 Public Goods and Services
• Have unique characteristics that make it
unlikely that the market will provide
enough of them
– Government often provides them

• Most economists agree that the provision

of public goods and services is an
appropriate role for government
– Concerned with just what goods and services
these will be, and how much of them we want

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 Spillovers
• Occur when some cost (or benefit) related
to production or consumption “spills over”
onto people not involved in the production
or consumption of the good
– Environmental pollution is the most obvious
example of a spillover cost to society
– Education provides significant spillover
benefits to society

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 Equity
• Issues of equity:
– Discrimination
– Poverty
– Inequality of income distribution
– Housing
– Health care

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 Market Power and Trade
• Market power
– Ability to influence market price of a product
• Competition protects us from
unreasonable prices
– Pure competition
• A market in which many independent producers
compete to sell a standardized product to many
independent buyers
• International trade enhances competition
and reduces market power
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 Special Markets
• Markets for some products are often
considered too important to be left alone to
the marketplace
– Housing
– Health care
– Agriculture
– Care of the elderly

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 Stability
• Because prices and employment tend to
fluctuate, our market economy is
inherently unstable
• Inflation
– A rise in the average price level in the
economy

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 Microeconomics vs. Macroeconomics

• Microeconomics
– Deals with individual activity within the
economy
• Distribution of income within the country
• Nature of individual markets such as agriculture

• Macroeconomics
– Deals with the economy as a whole
• Total income
• Total output in the economy

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 The Economic Left and the Economic Right

• THE ECONOMIC • THE ECONOMIC

LEFT (Liberal) RIGHT (Conservative)
– The Extreme Left – The Extreme Right
• Pure Socialism • Pure Capitalism
– Characteristics – Characteristics
• Government ownership • Private ownership of
of land and capital land and capital
• Government economic • Private economic
decision making decision making
– Values – Values
• Equity • Efficiency
– Goal – Goal
• More government in the • Less government in the
economy economy
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Appendix: Increasing Opportunity Costs

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