Scarcity and Choice

Economists tslk of the basic economic problem: there is never enough resources for everyone to have everything they want. Choices have to be made.

Transcript

1. CSEC Preparation Lessons Economics
2.   Scarcity and Choice Understanding Economic Graphs Unit 3: Nature of Economics Unit 3: Nature of Economics Topic
3. Learning Objectives Learning Objectives    Explain the concept of scarcity and choice within an economy. Define opportunity cost and money cost Understanding how to correctly use graphs to Illustrate economic concepts
4. The concepts of scarcity and choice The concepts of scarcity and choice • • Economists Talk of the basic economic problem There are Never Enough resources for everyone to have everything that they want. Choices have to be made. All the factors of production, that is; land, labour and capital are all limited. It is this lack of what is available, relative to that wanted, that leads to the reality of us all making choices
5. • • Decision-making over the use of resources involves: Making a choice (we can do one thing or the other) Making a sacrifice (if we choose to do one thing with a resource we cannot do another)
6. There are several types of resources There are several types of resources
7. Economic Trade-offs Economic Trade-offs • • What are tradeoffs? A trade-off involves a sacrifice that must be made to get a certain product or experience. A person gives up the opportunity to buy 'good B,' because they want to buy 'good A' instead. For a person going to a baseball game, their economic trade-off is the money and time spent at the ballpark, as compared to the alternative of watching the game at home and saving their money, plus the time spent driving to the ball game.
8. One such trade off is One such trade off is
9. Opportunity cost Opportunity cost • • We often ask someone with a new purchase how much did it cost? We are asking how much was paid for it that is the money cost. In economics we use a slightly different meaning to cost , economists believe that opportunity cost reviews the real cost of making a choice
10. • • • The opportunity cost or real cost of a decision is the value of the next best alternative of this decision forces a person to do without. The monetary cost is the market price of the goods. The real cost of any choice is therefore the alternative that is sacrificed, i.e. what you give up to get what you want.
11. Exam tip Exam tip •A useful definition to learn is that opportunity cost is the highest value alternative given up when a choice is made. A value refers to the decision-maker's evaluation
13. Exam Tip Exam Tip Shortage of a good is different from scarcity. A shortage occurs when the demand for a good exceeds Supply this can be solved. Scarcity, however, will always exist because once will always exceed the availability of resources to satisfy them.
14. Key Points Key Points • • Goods and services are scarce relative to wants and needs for them Opportunity cost is the next best alternative that is sacrificed when a choice is made.
15. Introduction to Graphs in Economics
16. • Economics uses graph to illustrate real-world ideas. They usually show the relationship between two or more variables where one item is represented on the y-axis and the other on the x-axis. Note: When illustrating graphs which involves price and/quantity The vertical axis ( or the y axes), represents price (P) The horizontal axis (or the x axes) represents quantity (Q). y-axis x-axis
17. • whether it is straight or actually curved. E.g. the supply and demand curve. • The line resulting from plotting the points on the graph is referred to as a curve, Dem and Curve
18. • A curve that slopes downwards is called a negative slope and shows an inverse relationship between the • variables being compared. i. e. the higher in value one gets the lower the other gets.
19. ------------------- ------------------------------------- ------------------ ----------------------------------------- Q1 P P1 Q
20. • A curve that slopes upward is called a positive slope and shows a direct relationship between the two variables being measured. i.e. as one increase in volume the other also increases in volume.
21. Guidelines to Drawing Graphs Guidelines to Drawing Graphs • 1. 2. 3. 4. Drawing a diagram does not sound too hard and thus you might not want to take the time to practice drawing a detailed labeling diagram What to pay attention to when drawing: Draw neat and precise diagrams so ALWAYS use a ruler and clear pen or pencil. Always label your axis clearly with a clear given example (good or service or country reference) Always label the original situation e.g. equilibrium (PE/ QE) and the new situation e.g. new equilibrium (P1/Q1) Use arrows to show any change e.g. demand or supply shifts or PE to P1 price level changes. Make your diagrams clearly visible so try not to include small drawings/ diagrams.
22. Guidelines to Drawing Graphs Guidelines to Drawing Graphs 5. 6. 7. 8. What to pay attention to when explaining: Explain clearly the original situation with reference to original variable e.g.. equilibrium or elasticity of curves. Explain the reason for change e.g. identify the non - price determinant Always remember to keep a clear focus on the question and to draw the most relevant diagram for your response Always comment on your diagrams so try to not integrate your diagrams at the end of an essay question without any further use
23. • So let’s check out some examples: Demand and Supply Diagram
24. Explanation of the diagram: In the diagram the demand and supply for cars in Europe is shown by Pe and Qe which is the equilibrium price and quantity of cars (E). As income tax in European countries decreased, European consumer’s disposable income and their purchasing power increased, leading to more demand for cars in Europe. This causes the demand curve to shift to the right from D to D1 at the price of Pe. This creates a shortage which causes an upward pressure on price.
25. Explanation of the diagram: As prices are rising, it signals to the producer to extend supply along the supply curve due to the law of supply and the profit motive (incentive). However, an increase in price signals to consumers to buy less and therefore demand contracts along the demand curve due to the law of demand and the income effect (incentive). This leads to a new equilibrium of P1, Q1 whereby prices have risen from Pe to P1 and the quantity of cars in Europe increased from Qe to Q1, rationing cars to the people who now have the ability and willingness.
26. CSEC Type Question CSEC Type Question • With the aid of a diagram, show how the production possibility curve can be used to illustrate Scarcity and Choice
27. Production Possibility Curve Production Possibility Curve Note the detailed labeling of the diagram including the title of illustration
28. The curve illustrates the combination of two products that can be produced by an economy using all its existing resources as fully and efficiently as possible. From the diagram above, it can be assumed that people are likely to want more (1), for example, 17 million consumer goods and 8 million capital goods, but the curve demonstrates that this is not possible because there are not enough resources(1). It also shows that the economy has to make choices(1), for example, it can produce 12 million consumer goods and 8 million capital goods or 13 million consumer goods and 6 million capital goods. The opportunity cost of producing one million more consumer goods as in this case, 2 million capital goods (1) (3 marks for drawing and labeling diagram) (Any two points, 2 marks each) 7 marks Mark Scheme Mark Scheme
29. Summary questions Summary questions • • What is the opportunity cost to a farmer of using his or her land to grow bananas? What is the opportunity cost of the government of building a school?