Microeconomic Principles and Problems_ A Pluralist -- Geoffrey Eugene Schneider -- 2nd, 2024 -- Routledge, Taylor & Francis Group -- 9781000985597 -- 15300e8f53118d1fe2850190fc3f6918 -- Anna’s Archive (1)

SCARCITY, CHOICE, AND OPPORTUNITY COST

  • Focus of the chapter: scarcity, opportunity cost, efficiency, cost-benefit analysis; use of the production possibilities curve (PPC) to illustrate society’s choices; application to issues like defense spending and growth; limitations of mainstream concepts; introduction to political economy and institutions.

  • Learning goals (summary):

    • Define and apply scarcity, opportunity cost, efficiency, and cost-benefit analysis.

    • Use a PPC to analyze opportunity costs of allocating resources.

    • Identify difference between capital goods and consumer goods; analyze growth implications via PPC.

    • Explain why political economists view mainstream scarcity/cost-benefit analysis as limited; analyze institutional factors shaping choices.

    • Critically analyze strengths/limitations of PPC and political economy approaches.

  • Core idea: mainstream economics uses scarcity and PPC to study choices; political economy emphasizes institutions that shape those choices.

2.1 SCARCITY, CHOICE, AND OPPORTUNITY COST

  • Scarcity definition (shared by mainstream and Austrian economics): resources are limited relative to unlimited wants; this necessitates making choices.

  • Demand vs constraints: Consumers want more (houses, cars, gadgets) but budgets are limited; firms want more output but inputs (labor, capital, materials) are limited; governments have limited tax revenues.

  • Choice framework: Consumers, producers, and governments select from limited options; cost-benefit analysis is used to evaluate decisions.

  • Opportunity cost concept: what is given up when choosing one option over the next best alternative.

    • Example: buying a $50,000 car vs next-best use of $50,000 (home addition, fewer work hours, or 4000+ cases of beer).

  • Importance of opportunity cost: forces consideration of all alternative uses of resources, not just the immediate benefit of the chosen option.

  • The opportunity cost concept is meaningful only if resources are being used efficiently.

  • Examples illustrating opportunity cost concepts:

    • 2.1.1 The opportunity cost of attending college:

    • Average cost (tuition + room/board, 2022–2023): public ≈ $93,000; private ≈ $214,000.

    • Foregone earnings if choosing college: ≈ $120,000 over four years (public) and substantial foregone earnings for private (implied in the text).

    • Financial lifetime earnings advantage of college graduates: ≈ $2,800,000 vs ≈ $1,600,000 for high school graduates (about 75% higher).

    • Non-financial benefits of college: personal development, civic engagement, diverse collaboration, etc.

    • 2.1.2 The opportunity cost of Sony devoting resources to its computer division:

    • Post-2010, PCs declined while mobile devices rose; Sony sold the computer division because continued investment in PCs had poor prospects; opportunity cost = resources and staff that could instead be devoted to mobile devices.

    • 2.1.3 The opportunity cost of U.S. government spending $1.7 trillion on F-35 aircraft:

    • Alternatives include: funding public university education for 18.3 million people, or giving every citizen a check of $4,857.

  • Efficiency and unemployment caveat:

    • Efficiency means all resources are employed productively. If resources are idle or underutilized, opportunity cost concepts don’t apply in the same way because you can’t produce more without sacrificing other goods.

    • Example: average US unemployment 2003–2022 ≈ 6%; if all unemployed were put to work, significant output could be produced with no opportunity cost (in the model sense).

  • Mainstream PPC model introduction:

    • PPC is a simple economic model showing all combinations of two goods that can be produced with fixed resources and technology.

    • PPC illustrates trade-offs (opportunity costs) when more of one good is produced.

2.2 THE PRODUCTION POSSIBILITIES CURVE: A SIMPLE, MAINSTREAM MODEL

  • Model purpose: visualize trade-offs between two goods (e.g., defense and education) given fixed resources/tech.

  • Figure 2.1 (described): All combinations of defense and education with full employment of resources (A through D on the curve; E inside; F outside).

  • Example points on PPC for defense (D) and education (E):

    • A: (Defense 40, Education 0)

    • B: (Defense 35, Education 60)

    • C: (Defense 20, Education 90)

    • D: (Defense 0, Education 100)

  • Opportunity cost along the curve (illustrated via table 2.2 and discussion):

    • B to C: increase education by 30 (60 → 90) requires sacrificing defense by 15 (35 → 20); 15D = 30E ⇒ 1D = 2E.

    • A to B: shift from all defense to some defense and some education; initial trade-offs show 5D = 60E ⇒ 1D = 12E (or 1 unit of defense costs 12 units of education).

    • C to D: shift to more education (from 90 to 100) costs 20D for 10E; 20D = 10E ⇒ 1D = 0.5E (each unit of defense sacrificed yields 0.5 unit of education).

  • Interpretation: These changes show the changing opportunity costs as resources shift between activities with different productive capabilities.

  • The table/figures illustrate: choice along PPC (A–D) requires full employment of resources; any point inside (e.g., E) indicates underutilization; a point outside (e.g., F) is unattainable with current resources/technology.

  • Geometry and intuition: point A to B to C to D demonstrates concavity and the law of increasing opportunity costs (discussed next in 2.3).

  • Assumptions