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PART I
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CHAPTER 1
SCARCITY AND CHOICE
CHAPTER GOALS
This chapter deals with the issues of scarcity and choice. After reading this chapter, students should be able
to:
• Discuss the meaning of economics and differentiate between microeconomics and macroeconomics.
• Describe the major features of the “economic way of thinking,” including thinking at the margin,
rational self-interest, positive and normative economics, and economic model-building.
• Explain the concept of scarcity and how it relates to opportunity costs and the production possibilities
curve.
• Discuss how economic growth can present trade-offs between present and future consumption.
• Describe how economic sanctions can relate to a nation’s production possibilities.
• Explain how the fundamental economic questions are answered by a market economy, a command
economy, and a mixed economy.
LECTURE HINTS AND IDEAS
This chapter introduces students to some basic vocabulary and principles. The presentation of the important
concepts of scarcity, choice, and opportunity costs leads naturally to production possibilities curve analysis.
Here in the first chapter, students learn about economic models, the difference between positive and
normative economics, and how to interpret data in a table and in a figure. The main types of economic
systems are discussed, along with the role of resource and product markets. The study of the circular flow
model, in the context of the market economy, brings an opportunity to look at some interesting issues of
market failure, including pollution, monopoly, and unemployment.
The format of this chapter sets the pace for the rest of the course. It is important to get students
thinking like economists from the very beginning, with an early emphasis on marginal analysis. It is also
worthwhile to spend time making sure everyone understands how to read the tables and figures, and to
interpret the difference between a movement along a curve and a shift in a curve. Some students grasp this
right away, while others need to work on this more, perhaps because of different mathematical
backgrounds. Because this chapter covers such a variety of material, try to keep the presentation from being
too “choppy” by using lots of real-world examples, such as the text’s tables and news stories. This
approach stimulates student interest and serves as a preview of chapters to come.
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REAK-THE-ICE DISCUSSION STARTERS
1. “What does the word economics mean to you?” First-time students of economics will probably state
their answers in terms of money and finance, or in relation to macroeconomic concepts such as
inflation and unemployment. Students with some formal training in economics, or those who have
started reading the textbook, are more likely to mention the concepts of scarcity and choice.
2. “What are some of the choices that we make every day?” Answers will include what to wear, what to
eat, where to work, how many hours of work, and so on. After listing these decisions and their
alternatives, explain that we need to make choices because of scarcity. The definition of economics
follows naturally. Since all of the examples of choices so far will likely be from microeconomics, it
would be useful to now think about some examples from macroeconomics and to compare these two
main areas.
3. “What is your cost of attending (___________) College?” Record students’ responses on the board,
encouraging thought about both explicit costs (tuition, fees, books) and opportunity costs (forgone
earnings). Then record answers to the question, “What is your benefit of attending (___________)
College?” Student responses will include earning more in the future, having a more fulfilling job, and
becoming a more knowledgeable human being. Relate the comparison of costs and benefits to the
chapter concepts of thinking at the margin and rational self-interest.
4. “Consider the following statement: ‘The U.S. government should further restrict immigration so that
U.S. workers can earn higher wages.’ Do you think that all economists would agree?” The discussion
will have both positive and normative economics components, with more class disagreement likely
on the normative aspects that involve value judgments.
5. “As a result of the September 11, 2001 terrorist attck on the World Trade Center, the United States
declared war on terrorism. If this war grows to major proportions, how would this decision affect its
future economic growth?” The answer should focus on the direct loss of resources (lives and capital
lost) and opportunity cost of resources diverted to the war (tanks produced instead of new business
equipment). Use the production possibilities curve model to illustrate their answers. It is also possible
that the replacement of old capital with new capital can enhance growth as new technology is more
speedily adopted. Also, with increased emphasis on security, there could be a new national priority
for the development of technology which could ultimately be a boon to e-commerce and e-banking.
BRIEF ANSWERS TO STUDY QUESTIONS AND PROBLEMS
1. The opportunity cost of a hamburger is ½ pizza. If the prices of pizza and hamburgers were cut in
half, the opportunity cost of a hamburger remains ½ pizza.
a.
4 hamburgers = 1 pizza
b.
1 hamburger = 1 pizza
c.
2 hamburgers = 1 pizza
d.
2 hamburgers = 1 pizza
2. a.
A production possibilities curve assumes fixed resources, fully employed resources, and
unchanged technology. When we make these assumptions, we are looking at the economy over
a very short period.
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b.
c.
d.
e.
3. a.
b.
c.
d.
1 ton of steel = 2 tons of aluminum. The opportunity cost of a ton of steel in terms of aluminum
is greatest between points E and F.
As we move downward along the production possibilities curve, the cost of producing each
additional ton of steel increases in terms of tons of aluminum sacrificed.
Point G is inefficient because unemployment or underproduction occurs in the economy. Point
H is unattainable because it lies outside of the country’s existing production possibilities, given
fixed resources and technology.
The production possibilities curve would shift inward if there were a decrease in the nation’s
resources or productivity. More resources or higher productivity result in an outward shift in
the production possibilities curve.
Shift inward
Shift outward
Not change
Not change
4. As the industrial base of Bosnia deteriorates because of the war, its production possibilities decline.
5. The production possibilities curve would rotate outward—the autos intercept would increase, but not
the airplanes intercept. With a technology advance in airplanes and not autos, the production
possibilities curve would instead rotate outward—the airplanes intercept would increase, but not the
autos intercept.
6. Iraq’s production possibilities would decline as its stock of productive inputs declines. The sanctions
would exert greater pressure on Iraq to alter its behavior when (1) Iraq is in poor health, has limited
access to natural resources, or has a narrow production base where much of the labor force is
concentrated in a particular industry; (2) foreign trade accounts for a large share of Iraq’s economic
activity and is limited to a few trade partners or is concentrated in a few goods or services; (3) the
transportation network of Iraq is limited to a few key routes that can be blockaded by the imposing
nations; (4) the citizens harmed by sanctions can apply political pressure on the head of the Iraqi
government.