Choice in a World of Scarcity

Flashcards about making choices in a world of scarcity.

In 2015, what were the median weekly earnings for a full-time worker over 25 with no higher than a bachelor’s degree?

$1,224 weekly and $63,648 a year.

In 2015, what were the median weekly earnings for someone with no higher than a high school diploma?

$664 weekly and $34,528 over 12 months.

According to the Bureau of Labor Statistics (BLS), earning a bachelor’s degree boosted salaries by what percentage over what you would have earned if you had stopped your education after high school?

54%

In 2014, what percentage of the population in the United States had a high school diploma?

Almost 88%

In 2014, what percentage of 25–65 year olds had bachelor’s degrees?

33.6%

In 2014, what percentage of 25–65 year olds had earned a master’s?

7.4%

What economist described not always getting what you want in his Essay on the Nature and Significance of Economic Science in 1932?

Lionel Robbins (1898–1984)

What is the condition where scarcity of means to satisfy given ends is an almost ubiquitous condition of human nature?

Because people live in a world of scarcity, they cannot have all the time, money, possessions, and experiences they wish. Neither can society.

What three critical concepts are introduced in this chapter?

Opportunity cost, marginal decision making, and diminishing returns.

What does the opportunity set identify?

All the opportunities for spending within his budget.

What does the budget constraint indicate?

All the combinations of burgers and bus tickets Alphonso can afford when he exhausts his budget, given the prices of the two goods.

If Alphonso spends all his money on burgers, how many can he afford per week, given that he has $10 and burgers cost $2 each?

Five burgers per week.

If Alphonso spends all his money on bus tickets, how many can he afford per week, given that he has $10 and bus tickets are 50 cents each?

20 per week.

What would it cost Alphonso for one more burger if he is currently at point D, where he can afford 12 bus tickets and two burgers?

Four bus tickets. That is the true cost to Alphonso of one more burger.

What term do economists use to indicate what must be given up to obtain something that is desired?

Opportunity cost

What is the value of the next best alternative?

Opportunity cost.

What is a fundamental principle of economics?

Every choice has an opportunity cost.

What are the out-of-pocket costs of attending college?

Tuition, books, room and board, and other expenses.

Besides out-of-pocket costs, what is another cost of attending college?

An opportunity cost of lost earnings.

What is one of the biggest costs of greater airline security?

The opportunity cost of additional waiting time at the airport.

What does marginal analysis mean?

Comparing the benefits and costs of choosing a little more or a little less of a good.

People desire goods and services for the satisfaction or __ those goods and services provide.

Utility

What is the common pattern where consumption of the first few units of any good tends to bring a higher level of utility to a person than consumption of later units?

The law of diminishing marginal utility

What does the law of diminishing marginal utility mean?

As a person receives more of a good, the additional (or marginal) utility from each additional unit of the good declines.

In the budget constraint framework, decisions do not look back to past choices and assumes that _, which are costs that were incurred in the past and cannot be recovered, should not affect the current decision.

Sunk costs

What should you focus on when dealing with sunk costs?

The marginal costs and benefits of current and future options.

Thinking about a model with many goods is a straightforward extension of what?

What was discussed here by drawing multiple budget constraints, showing the possible tradeoffs between many different pairs of goods.

What does the production possibilities frontier (PPF) illustrate?

The constraints faced by society.

What role does the production possibilities frontier play for society?

The same role for society as the budget constraint plays for Alphonso.

If society has chosen to operate at point B on a PPF, and it is considering producing more education, what is required?

Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. That is the tradeoff society faces.

What are the two major differences between a budget constraint and a production possibilities frontier?

The first is the fact that the budget constraint is a straight line. This is because its slope is given by the relative prices of the two goods. In contrast, the PPF has a curved shape because of the law of the diminishing returns. The second is the absence of specific numbers on the axes of the PPF.

Why was the production possibilities frontier for healthcare and education drawn as a curved line?

Because of the law of the diminishing returns.

What does the law of diminishing returns hold?

As additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline.

What two kinds of efficiency can the production possibilities frontier illustrate?

Productive efficiency and allocative efficiency.

What does productive efficiency mean?

Given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good.

What does allocative efficiency mean?

The particular mix of goods a society produces represents the combination that society most desires.

Why must society choose?

Improvements in productive efficiency take time to discover and implement, and economic growth happens only gradually. So, a society must choose between tradeoffs in the present.

What gives us information about the tradeoff between devoting resources to producing one good versus another?

The curvature of a country’s PPF.

When can a country produce a good at a lower opportunity cost than another country?

When a country has a comparative advantage in that good.

What will countries specialize in and trade when they engage in trade?

The production of the goods that they have comparative advantage in, and trade part of that production for goods they do not have comparative advantage in.

What are people portrayed as in the economics approach?

Self-interested.

Philosophers draw a distinction between , which describe the world as it is, and , which describe how the world should be.

Positive statements, normative statements

What did Adam Smith christen the property of self-interested behavior and profit-seeking?

The invisible hand.

What three basic themes does the tradeoff diagram always illustrate?

Scarcity, tradeoffs, and economic efficiency.

What shows productive efficiency?

All choices on the production possibilities frontier because in such cases, there is no way to increase the quantity of one good without decreasing the quantity of the other.

What is the choice on a production possibilities set or an individual’s budget constraint that is personally preferred?

Allocative efficiency.

Why might people choose not to get a college degree?

Because they may have to borrow money to go to college, and the interest they have to pay on that loan in the future will affect their decisions today.

What is a budget constraint?

All possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set.

What is opportunity cost?

Measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative.

What is a production possibilities frontier (PPF)?

A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.

What is a normative statement?

Statement which describes how the world should be