Scarcity and Opportunity Costs

Opportunity Costs

The highest valued alternatives that must be forgone when a choice is made.

Scarcity

The shortage that exists when less of something is available than is wanted at a zero price.

Trade-off

Refers to the giving up of one good or activity in order to obtain some other good or activity.

Production Possibilities Curve

A graphical representation showing all possible combinations of quantities of goods and services that can be produced using the existing resources fully and effectively.

Labor

The physical and intellectual services of people, including the education, training, and abilities of the individuals in a society.

Capital

Products such as machinery and equipment that are used in production.

Land

Refers to all natural resources, such as minerals, timber, and water, as well as the land itself.

Financial Capital

The source of funds used to purchase capital (bonds, stocks).

Comparative Advantage

An advantage derived from comparing the opportunity costs of production in two countries.

Gains from Trade

The difference between what can be produced and consumed without specialization and trade and with specialization and trade.

Marginal

Additional, incremental.

Resources

Goods used to produce other goods.

What is the goal of the curve?

The goal is to produce on the curve.

What is the optimum point on the curve?

The optimum point on the curve is where you have production and allocated efficiency.

What causes the PPC to move outward (Grow)?

The PPC moves outward as the result of increased resources, larger labor force, change in labor force participation, change in labor-leisured decision, improved technology, expansion of capital stock, and an improvement of the rules.

What happens as the labor force grows?

Output goes up.

What happens when there is no capital stock?

No capital stock means no output.

What is the Production Possibilities curve about?

It is about a trade-off between two different things.

What does a point lying inside the production possibilities curve indicate?

A point lying inside the production possibilities curve indicates underutilization, unemployment, or inefficient use of resources: more goods and services could be produced by using the limited resources more fully and efficiently.

When does the production possibilities curve shift?

The production possibilities curve shifts whenever everything else is not constant.

What do points outside of the Production Possibilities Curve indicate?

Points outside the Production Possibilities Curve represent combinations of goods and services that are unattainable given the resource limitations.

What are the three types of resources that are used to produced goods and services?

Three types of resources used to produce goods and services: land, labor, and capital.

What are the kinds of income that the owners of resources are provided for selling their services?

Landowners are paid rent, laborers receive wages, and capital receives interest.

What do people use their resources for?

People use their resources to acquire income with which they purchase the goods they want.

What do producers do with the money received from selling the goods?

Producers use the money received from selling the goods to pay for the use of the resources in making goods.

Why do certain resource owners as people allocate their scarce resources?

Certain resource owners as people allocate their scarce resources to best satisfy their wants.

What is an allocation system?

An allocation system is the process of determining who gets the goods and services and who does not.

Why are markets selected to do the allocation?

The incentives each allocation system creates is a fundamental reason why markets are selected to do the allocation. Only a market system creates the incentives that lead to increasing standards of living.

What does the allocated efficiency measure?

The allocated efficiency measures the selection of a choice that society makes to benefit themselves.

Why do economic agents not produce the things for which they have the lowest opportunity costs and not trade for those with higher costs?

Economic agents do not do this because such choices involve giving up the least amount of other things.

What happens when trade is voluntary?

When trade is voluntary, all parties expect to gain from the trade. They expect to get something they prefer more than the something they give up.

What are allocation schemes?

Allocation schemes include lottery, government, market, and first-come, first-serve.