Chapter 2 Scarcity &

Competition
 Part I
– Scarcity

 Part II
– Production Possibility Frontier

Chapter 2 Scarcity & Competition 1

 Part I
Scarcity

Chapter 2 Scarcity & Competition 2

Learning Objectives

 Scarcity
 Scarce Good vs. Free Good
 Questions About Scarcity

Chapter 2 Scarcity & Competition 3

Learning Objectives

 Scarcity
 Scarce Good vs. Free Good
 Questions About Scarcity

Chapter 2 Scarcity & Competition 4

Scarcity

 Scarcity refers to a situation where

the availability of resources in the
economy is limited relative to people’s
wants.

 It is referred as the first economic

problem. Why?

Chapter 2 Scarcity & Competition 5

Scarcity

 Because of ‘scarcity’, we have to

distinguish 2 kinds of goods:
– Scarce good
– Free good

Chapter 2 Scarcity & Competition 6

Learning Objectives

 Scarcity
 Scarce Good vs. Free Good
 Questions About Scarcity

Chapter 2 Scarcity & Competition 7

Scarce Good vs. Free Good
 Scarce good is defined as an entity
(or commodity) of which people want
more than they already have. It is also
known as economic good.

 Free good is defined as an entity (or

commodity) of which no one wants
more than they already have.

Chapter 2 Scarcity & Competition 8

 Question

 Identify whether the following

commodities are free goods or
scarce goods.
a. your pocket money
b. fresh air in this classroom
c. fresh air on the playground
d. my lecture
e. rubbish
Scarce Good vs. Free Good

 The good is something of which

– some is better than none, or
– more is better than less.

 The bad is something of which less is

better than more.

Chapter 2 Scarcity & Competition 10

Scarce Good vs. Free Good
 Scarce good is defined as an entity (or
commodity) that the quantity demanded is
greater than quantity supplied when the
price is zero.

 Free good is defined as an entity (or

commodity) that the quantity supplied is
greater than quantity demanded when the
price is zero.
Chapter 2 Scarcity & Competition 11
 P P

D S D S

0 Q Q
0

Economic Goods Free Goods

Learning Objectives

 Scarcity
 Scarce Good vs. Free Good
 Questions About Scarcity

Chapter 2 Scarcity & Competition 13

Questions About Scarcity
 It is the fact that most of the goods or
services that we want are scarce goods
because either
– the amount endowed by nature cannot satisfy
all our wants,
– or the goods and services that we want have to
be produced from scarce resources.

 Therefore ‘scarcity’ is an universal

phenomenon.
Chapter 2 Scarcity & Competition 14
 Question

1. Is scarcity ‘shortage’?
2. Is scarcity caused by poverty?
3. Can scarcity be solved by
a. raising production?
b. raising the market price?
c. competition?
 Question

1. If there was no ‘scarcity’, then could

we have economics?
Learning Objectives

 What Does Scarcity Lead to?

 Concept of Cost

Chapter 2 Scarcity & Competition 17

Learning Objectives

 What Does Scarcity Lead to?

 Concept of Cost

Chapter 2 Scarcity & Competition 18

Scarcity Competition Discrimination
What Does Scarcity Lead to?
 Competition refers to the action of people
in the society to claim the use of the scarce
resources, which results in the
discrimination of winners and losers.

 Discrimination distinguishes between who

gets the resources and who does not.

Chapter 2 Scarcity & Competition 20

What Does Scarcity Lead to?

 There are 2 types of competition:

1. Price competition
2. Non-price competition

Chapter 2 Scarcity & Competition 21

What Does Scarcity Lead to?

 Price competition refers to a

competition where the ability to pay
the highest price is used as a criterion.

 Non-price competition refers to a

competition in terms of factors other
than price.

Chapter 2 Scarcity & Competition 22

 Question

 How can you go to the University?

 Who can win the beauty contest?
 Who is the winner of a football
match?
 Who win the Mark Six?
Learning Objectives

 What Does Scarcity Lead to?

 Concept of Cost

Chapter 2 Scarcity & Competition 24

Concept of Cost

 ‘Cost’ is defined as the highest valued

alternative that must be sacrificed to
obtain something or to satisfy a want.

 It is also known as ‘opportunity cost’.

Chapter 2 Scarcity & Competition 25

Concept of Cost

 The full cost of action refers to the

total opportunity cost of that action.

Chapter 2 Scarcity & Competition 26

Full Cost  Explicit Cost  Implicit Cost

Monetary
expenses
Non-monetary
expenses
 Example

 What is the ‘cost’ of playing table

tennis?

 What is the ‘cost’ of seeing a film that

you have a ticket for free?
 Question

Suppose there are two farmers A & B having

the same productivity. A is a landlord who
owns his/her own land and B has to rent the
land from other landlords. The following table
shows the revenue, expense and net gain of
each of them.
 Question

Situation 1

Farmer A Farmer B
Revenue $100 $100
$ per
year
Expense $0 $60
Net gain $100 $40
 Question

Situation 2

Farmer A Farmer B
Revenue $40 $40
$ per
year
Expense $0 $60
Net gain $40 -$20

How would farmers A & B react to this change?

 Part II
Production Possibility
Frontier

Chapter 2 Scarcity & Competition 32

Learning Objectives

 Production Possibility Frontier

 The Model

Chapter 2 Scarcity & Competition 33

Learning Objectives

 Production Possibility Frontier

 The Model

Chapter 2 Scarcity & Competition 34

Production Possibility Frontier
 Production Possibility Frontier (PPF) or
production possibility boundary is a simple
economic model of an economy to describe
the following concepts:
1. Scarcity
2. Production Efficiency
3. Choice and Opportunity Cost
4. Growth

Chapter 2 Scarcity & Competition 35

Production Possibility Frontier

 The PPF shows the maximum amount

of goods and services that can be
produced by an economy with the
existing resources and technology.

Chapter 2 Scarcity & Competition 36

Learning Objectives

 Production Possibility Frontier

 The Model

Chapter 2 Scarcity & Competition 37

 The Model

 Imagine there is an island with only

10 dwellers. Assuming that this small
economy has only one limited
resource, that is, labour.

 Since each dweller can work for 12

hours a day, the total amount of
natural resources in this island is 120
man-hours.
 The Model

 If all the workers farm, a total of

1,000kg of wheat can be produced
each year. On the other hand, if all
the workers fish, 1,200 kg of fish can
be caught each day.
 Wheat Fish
(kg per day) (kg per day)
1,000 0

875 600

825 700

550 1,000

375 1,100

0 1,200
 PPF
1,000

875
825
Wheat (kg per day)

550

375

0 600 700 1,000 1,100 1,200

Fishes (kg per day)

 PPF Unattainable
region
Wheat

0
Fishes
Production Possibility Frontier
 Production Possibility Frontier (PPF) or
production possibility boundary is a simple
economic model of an economy to describe
the following concepts:
1. Scarcity
2. Production Efficiency
3. Choice and Opportunity Cost
4. Growth

Chapter 2 Scarcity & Competition 43

Production Possibility Frontier

 Given that there are limited resources,

scarcity will occur whenever the
people on the island desire those
combinations of goods that are
beyond the PPF.

Chapter 2 Scarcity & Competition 44

Production Possibility Frontier
 Production Possibility Frontier (PPF) or
production possibility boundary is a simple
economic model of an economy to describe
the following concepts:
1. Scarcity
2. Production Efficiency
3. Choice and Opportunity Cost
4. Growth

Chapter 2 Scarcity & Competition 45

Production Possibility Frontier
 Efficient use of resources implies that
it is impossible for the economy to
have more of one good without
reducing the production of another
good.

 Any production point along the PPF is

efficient.

Chapter 2 Scarcity & Competition 46

 PPF Unattainable
region
Wheat

Inefficient
region

0
Fishes
Production Possibility Frontier
 Production Possibility Frontier (PPF) or
production possibility boundary is a simple
economic model of an economy to describe
the following concepts:
1. Scarcity
2. Production Efficiency
3. Choice and Opportunity Cost
4. Growth

Chapter 2 Scarcity & Competition 48

Production Possibility Frontier
 Because of the existence of trade-offs
between farming and fishing, the
opportunity cost of farming is equal to the
loss of fish and the opportunity cost of
fishing is equal to the loss of wheat.

 The magnitude of the slope of the PPF

represents the cost of catching one
additional kg of fish. It is also known as the
marginal cost of fishing.
Chapter 2 Scarcity & Competition 49
 Question

 What are the opportunity costs of

fishing in the following ranges:
a. 600 to 700 kg of fishing
b. 1,000 to 1,100 kg of fishing?
 W
1,000 W
slope 
875 F
825
 MC fishing
Wheat (kg per day)

550

375

0 600 700 1,000 1,100 1,200

F
Fishes (kg per day)
In the range of 600 to 700 kg of fish :

50
The MC of fishing  0.5kg (i.e., ) of wheat
100
 Question

 What are the opportunity costs of

fishing in the following ranges:
a. 600 to 700 kg of fishing
b. 1,000 to 1,100 kg of fishing?
 1,000 W
slope 
875 F
825
 MC fishing
Wheat (kg per day)

550

375

W
0 600 700 1,000 1,100 1,200

Fishes (kg per day) F

In the range of 1,000 to 1,100 kg of fish :

175
The MC of fishing  1.75kg (i.e., ) of wheat
100
 Question

 What are the opportunity costs of

farming in the following ranges:
a. 600 to 700 kg of fishing?
 W
1,000 W
slope 
875 F
825
 MC fishing
Wheat (kg per day)

1 F

slope W
550
 MC farming

375

0 600 700 1,000 1,100 1,200

F
Fishes (kg per day)
Production Possibility Frontier
 Production Possibility Frontier (PPF) or
production possibility boundary is a simple
economic model of an economy to describe
the following concepts:
1. Scarcity
2. Production Efficiency
3. Choice and Opportunity Cost
4. Growth

Chapter 2 Scarcity & Competition 58

Production Possibility Frontier
 Growth of an economy can be induced
by the following factors:
– Increasing the amount of resources
– Improvement of technology
– Accumulation of capital goods

 It is represented by an outward shift of

the PPF curve.
Chapter 2 Scarcity & Competition 59
 Unattainable
region
PPF
Wheat

0
Fishes
 Example

 Draw the PPF of two goods (wheat

and fish) which have constant
marginal cost of production.
 PPF
Wheat

0
Fishes