Download Chapter 1

Contemporary Economics:
An Applications Approach
By Robert J. Carbaugh
Chapter 1:
Scarcity and Choice
Copyright ©2006 by Thomson South-Western. All rights reserved.
Scarcity and Opportunity Cost
Opportunity cost and choice
A
Number of compacts
80
Car-wash
possibilities
B
60
C
40
D
20
E
0
0
10
20
30
40
Number of minivans
Carbaugh, Chap. 1
2
Opportunity Cost
Production possibilities curve
Computers
(millions)
Possible combinations
of computers and VCRs
A
6
A
6
B
5
Production
possibilities curve
(PPC)
4
Attainable and
unattainable production
combinations
Computers
(millions)
Production possibilities
curve (PPC)
B
5
F
4
Points along PPC
imply no unemployed
resources and efficient
production
C
3
2
1
Unattainable
C
3
Foregone
output
2
E
1
D
0
0
1
2
3
VCRs (millions)
Carbaugh, Chap. 1
Inefficient
D
0
0
1
2
3
VCRs (millions)
3
Opportunity Cost
Law of increasing opportunity cost
Computers
(millions)
A
6
A bowed outward PPC
illustrates increasing
opportunity costs
B
5
4
C
3
2
1
D
0
0
1
2
3
VCRs (millions)
Carbaugh, Chap. 1
4
Changes in the PPC
Economic growth on the PPC
Computers
(millions)
E
Economic growth is
illustrated by an outward
shift in a nation’s PPC
F
3
G
C
PPC0
PPC1
0
0
2
VCRs (millions)
Carbaugh, Chap. 1
5
Economic Growth
Economic growth in U.S. and Japan
Consumer
goods
(hamburgers)
United States
Next year's production
possibilities
Consumer
goods
(hamburgers)
Japan
Next year's production
possibilities
Japan's choice to
favor capital goods
(point A) will shift
its future PPC
farther out
The U.S. choice to
produce more
consumer goods
(point A) limits future
production growth
A
PPC0
PPC0
This year's
production possibilities
PPC1
Capital Goods (machinery)
Carbaugh, Chap. 1
A´
This year's
production possibilities
PPC1
Capital Goods (machinery)
6
Economic Growth
Opportunity cost of national security
Security
Goods
G
F
E
PPC0
PPC1
Nonsecurity Goods
Carbaugh, Chap. 1
7
Economic Growth
Economic sanctions
Iraq
Machines
A
PPC0 (before sanctions)
PPC1
(after sanctions)
Oil (barrels)
Carbaugh, Chap. 1
8
Reading Tables & Graphs
Shifting relationships
Initial grading standard
GPA
K
4.0
J
3.0
GPA
Revised grading standard
4.0
Lower grading
standard
3.0
Rise = 1
I
2.0
2.0
Run = 2
H
1.0
1.0
0
0
0
2
4
6
8
Hours of study time per week
Carbaugh, Chap. 1
Higher grading
standard
0
2
4
6
8
Hours of study time per week
9
Economic Systems
Fundamental economic questions
Scarcity
Answered by
Imposes
Type of economic system:
- Market economy
- Command economy
- Mixed economy
Fundamental economic questions:
- What to produce?
- How to produce?
- For whom to produce?
Carbaugh, Chap. 1
10
Economic Systems
Market economy: circular flow model
Resource markets
Land, labor,
capital and
entrepreneurship
Business firms
Rent, wages,
interest and
profits
Households
Consumption
expenditures
Goods and
services
Product markets
Carbaugh, Chap. 1
11