Ch 2 - Scarcity

Introduction & Context

• Average automobile usage

  • In motion only 5 % of the time; parked or stuck the remaining 95 %

  • Sets up chapter theme: evaluating land/time devoted to parking & congestion

• Chapter goal: equip you to calculate fundamental costs behind such allocation decisions

• Learning Objectives

  • 2.1 Scarcity affects everyone

  • 2.2 Scarcity ⇒ opportunity cost & trade-offs

  • 2.3 Obtaining more of one good usually costs increasing amounts of others

  • 2.4 Society must trade present consumption vs. capital accumulation

  • 2.5 Differentiate absolute vs. comparative advantage

Did-You-Know Data Points

• Typical U.S. resident sleeps almost 9 h/day

  • ≈ 15 min longer than five years ago

  • Extra sleep → forgone income-earning work ⇒ opportunity cost

2.1 Scarcity

• Core definition

  • Occurs when resources < unlimited wants

  • Universal & permanent; includes time

• Misconceptions

  • NOT merely a shortage (temporary) or poverty (distributional)

• Key production vocabulary

  • Production = transforming inputs into outputs

  • Resources / Factors of Production

  • Land = natural resources

  • Labor = human effort

  • Physical capital = manufactured aids to production

  • Human capital = accumulated education & training

  • Entrepreneurship

    • Raising capital, organizing inputs, strategic decisions, risk-taking

• Goods & Services

  • Economic goods = scarce goods (QD > QS at zero price)

  • Services = intangible goods (tasks performed for others)

• Needs vs. Wants

  • “Need” not analytically usable; economists focus on limitless wants

2.2 Opportunity Cost, Trade-Offs, & Choices

• Opportunity Cost concept

  • OC = \text{value of highest-ranked foregone alternative}

  • Always measured as a forgone opportunity, not out-of-pocket money alone

• Illustrative questions (implicit answers)

  • OC of attending class = lost wages/leisure/etc.

  • OC of attending a concert = ticket price and alternative use of that time

  • OC of gym workout = next best use of hour + energy

• Behavioral research on leisure choice

  • All income levels devote ≈ same time to leisure

  • High earners pursue more active leisure (exercise, charity) → higher enjoyment payoff relative to high hourly OC

  • Low earners choose more passive leisure (TV)

• Trade-Off principle

  • Using a resource for activity A precludes its use for activity B

  • Value of B = opportunity cost of A

• Production-Possibilities Curve (PPC)

  • Graph of all attainable efficient output combinations given fixed tech/resources/time

  • Straight-line PPC

  • Constant OC between goods (rare)

  • Bowed-out PPC (typical)

  • Reflects law of increasing additional cost (specialized resources)

  • Study-time example (Math vs. Economics grades)

  • Moving resources (hours) toward Econ raises Econ grade but lowers Math, slope = OC of extra Econ points

• Airline restroom example

  • Reducing restroom width from 33 → 26 inches frees space for extra seating row ⇒ millions in lifetime revenue ⇒ trade-off between comfort & revenue

2.3 Economic Choices a Nation Faces

• Using PPC for an entire economy (Smartphones vs. Tablets)

  • Table of combinations A–G illustrates decreasing smartphone output as tablet production rises

• Assumptions behind PPC

  1. Full employment of resources

  2. Specific time period

  3. Fixed resource quantities/qualities

  4. Constant technology

• Technology defined: total pool of applied production knowledge

• Efficiency

  • Productive efficiency = max output from given inputs OR minimum cost per output

  • Inefficient points lie inside PPC (under-utilization)

• Law of Increasing Additional Cost (LOIAC)

  • Producing more of Good X raises OC in terms of forgone Good Y

  • Bowed PPC shape; steeper as specialization increases

• Resource adaptability & PPC curvature

  • Perfectly adaptable resources → straight line (rare)

  • Highly specialized resources → strongly bowed PPC

• Policy application: Bicycle lanes

  • Adding lanes on fixed-width roads crowds cars, increases congestion, removes parking — marginal cost of each extra lane rises sharply (LOIAC in urban planning)

• Big-Data civic analytics example

  • Cities use sensors & mobile data to allocate police presence, traffic signals, etc. ⇒ data-driven mitigation of scarcity

2.4 Economic Growth & Present-Future Trade-Off

• Economic Growth

  • Outward PPC shift ⇒ ability to consume & produce more of everything

• Consumption vs. Capital Goods

  • Consumer (C) goods satisfy current wants

  • Capital (K) goods create future production capacity

• Present-Future trade-off

  • Choosing a point with higher K today (lower C) moves economy along PPC toward capital axis

  • Over time, higher K → faster outward PPC shift → higher future C (growth dividend)

  • Figures 2-5(a)&(b) illustrate: point A (more K) yields larger future PPC than point C (less K)

• Fracking wastewater case

  • Specialized disposal firms handle waste at 25 % lower cost ⇒ comparative advantage lowers OC for oil drillers → resource reallocation

2.5 Comparative Advantage & Maximizing Future Income

• Specialization basics

  • Organizing production so each agent concentrates on tasks where OC is lowest

  • Increases productivity via learning-by-doing & division of labor

• Absolute vs. Comparative Advantage

  • Absolute advantage: ability to produce more with same inputs (or same with fewer)

  • Comparative advantage: ability to produce at lower opportunity cost

  • Only comparative advantage is necessary for mutually beneficial trade

• Decision rule for individuals & nations

  1. Compute OC for each good/task

  2. Specialize in lowest-OC good

  3. Trade for others → both parties can consume outside their individual PPCs

• Adam Smith & pin factory: division of labor into 18 subtasks ↑ output dramatically — early empirical support

• Modern example: Digital-device assembly lines (touchscreen connector worker, screen fitter, etc.)

• Interstate & International Trade

  • Comparative advantage applies at all scales; underlies U.S. interstate commerce & global trade flows

• Gains from specialization & trade

  • Higher total output

  • Rising average standard of living

• Rocket Lab case study

  • U.S. airspace has high alternative value (OC) ⇒ rocket launches relocated to low-OC New Zealand skies

Issues & Applications: “No Such Thing as Free Parking”

• U.S. vehicle ownership far higher than other populous nations (see Fig 2-6)

• Average car parked ≈ 23 h/day

• Land used for parking has an OC (alternative development, green space, etc.)

• Optimal decision weighs perceived parking benefit against that OC

Summary of Learning Objectives

• 2.1 Scarcity universal; wealth ≠ escape from choices

• 2.2 Scarcity forces trade-offs; OC frames decision-making

• 2.3 Because resources are specialized, marginal OC of a good typically rises

• 2.4 Choosing more capital today (> present goods) accelerates future growth

• 2.5 Absolute advantage = productivity; comparative advantage = lower OC ⇒ basis for specialization & trade

Key Equations & Numerical References

• Opportunity Cost formula: OC = \text{Value of Next-Best Alternative}

• Law of Increasing Additional Cost illustrated by incremental tablet moves (Fig 2-3):

  • E.g., moving smartphone production from point C to D: lose 5 million smartphones to gain 10 million tablets ⇒ OC_{tablet}=0.5 smartphones each; cost rises along curve

• Sleep statistics: 9\text{ h} − 15\text{ min increase} over 5 yrs

• Restroom width reduction: 33\text{ in} \rightarrow 26\text{ in}

• Vehicle motion share: 5\% active, 95\% parked/idle

• Wastewater disposal cost share in fracking: 25\% of total project cost