SCARCITY, CHOICE, AND OPPORTUNITY

• Economics studies how we use our scarce

resources to specialize in production and to
exchange and consume goods and services
according to prevailing economic system. We
—households, businesses, and governments—
are the main actors on the economic stage.
The economic system comprises the legal,
political, and social institutions that organize
exchange.
 Concepts and Themes
• So much information is packed into our definition
of economics that these key concepts need to be
explained:
• Economic Agents;
• Scarce Resources;
• Choice;
• Specialization;
• Exchange;
• And Economic Systems
 1.Economic Agents
• Economic agents are those individuals and
organizations that engage in production,
exchange, specialization, and consumption. They
can be individuals in households, businesses, non
profit organizations or governments. How many
economic agents are there in the American
economy? Roughly--100 million single- and
multiple-person households;15 million
businesses; and80,000 governmental units.
 2. Scarce Resources
• Scarce resources are land and natural resources, labor,
and capital resources the demands for which exceed
the supply if they were given it away free. Resources are
the land and natural resources, labor, and capital
(plants, equipment, and inventories) that can be
combined to produce goods and services. They are also
called the factors of production. They present economic
wealth because they ultimately determine how much
output we can produce. Land (farmland to garbage
dump); Capital (hydroelectric dam to a power); Labor
(skilled surgeon to ditch-digger)
 2.Scarce Resources
• Scarcity exists when the amount of the good
or resource offered is less than what users
would want if it were given away free. Scarcity
has little to do with wealth or poverty; it exists
in both rich and poor communities. Free or
non scarce goods such as natural resources:
oxygen and sun’s rays are available in
abundance.
 3.Choice Scarcity forces economic agents
to make choices.
• The factors of production are limited; we
cannot produce infinite quantities of goods
and services. Households, businesses, and
governments must make economic choices
among scarce resources.
 4. Specialization and Exchange
• Specialization is the use of resources to their best
advantage.People specialize in law/medicine, farmland used for
corn/wheat, United States builds commercial aircrafts, etc.They
increase they material well-being by doing what they do relatively
better then others can.Adam Smith’s “The Wealth of Nations”
(1776)—specialization and exchange are the sources of economic
prosperity.(Specialization and Toyota’s Just-in-time Manufacturing
example)
• Specialization dictates exchange.Exchange is the trading of goods
and services produced through specialization.Without exchange,
specialization would be of no benefit because economic agents
would be left only with their own goods.Specialization and
exchange raise material well-being.
 5. Economic Systems
• To function effectively society must make choices in an
orderly fashion.Different societies use different institutions
to make their economic choices.The set of organizational
arrangements and institutions that are established to deal
with scarcity are called an economic system.
• Different economic systems:Under capitalism, resources
are privately owned and people make their own economic
decisions;Under socialism, the state owns the resources
and makes the decisions.Most economies are mixed
ownership systems in which the government owns some
of the resources and the rest are owned privately.
Limited Resources versus Unlimited Wants

• The imbalance between limited resources and

unlimited wants is the source of the economic
problem. Resources are scarce, we must choose
what products to produce, how these products are
to be produced, and for whom. Wants are the
goods and services we would wish to have if there
were no costs (if the prize were zero).The law of
scarcity states that wants will always exceed our
ability to meet them. There will never be enough
resources – need to make choices.
 What? The first choice is what?
• What goods should society produce with its
limited resources? By deciding what, society
decides which wants will be satisfied.
• How?
• Once an economy decides what to produce, it
must determine how to produce it. How refers
to how to combine resources to produce
output. Which combination of land, labor, and
capital resources will be used to produce
 For Whom?
• For whom refers to how output is divided
among the members of society. Will everyone
get an equal share? Will a few get most of the
output? Will differences in wealth be allowed
to persist over generations? The law of
scarcity teaches a hard lesson: All wants
cannot be satisfied, and therefore there will
be both winners and losers in the struggle for
goods.
 4. Solving the Economic Problem
• There is no formula for allocating scarce resources;
scarcity requires that choices be made. The
imbalance between wants and the ability to meet
them has forced all societies at all times to use
their economic systems to allocate scarce
resources. Allocation is the appointment of
resources for a specific purpose or to particular
persons or groups. Since the collapse of
communism, markets are the major means of
allocating scarce resources in the world’s economy.
 5.Opportunity Costs
• Choice means that when one action is taken, another must
be sacrificed. Costs are measured by these sacrificed
alternatives. The opportunity cost of an action is the loss of
the next-best alternative.
• Opportunity costs identify scarce goods: if a good is
available in sufficient supply so that there is more than
enough to go around, its opportunity cost is zero. Goods
that have zero opportunity costs are free goods. Users can
have more without others having to give up some of the
goods. Scarce goods have a positive opportunity cost. In
order to have more of a scarce good, an alternative must be
sacrificed.
6. Production Possibilities and Opportunity
Costs
• The production possibilities frontier (PBF) shows the
economic choices available when the factors of
production are utilized to their full potential.PBF is
used to illustrate scarcity, opportunity cost, and
efficiency. The PBF shows the combination of goods
and services available when the factors of production
are utilized to their full potential; it shows both
attainable and unattainable output combinations. The
economy is efficient when no resources are
unemployed and when no resources are misallocated.
 7. The Law of Increasing Costs
• The PBF is curved like a bow instead of being a
straight line. The opportunity cost of
increasing the production of one good is the
amount of the good that must be sacrificed.
The law of increasing costs states that
opportunity cost per unit will increase as
production increases.
 8. Macro and Micro
• Economics provides powerful tools to analyze
the real world. Macroeconomics studies total
output and its growth, total employment and
unemployment, and the general movement in
prices. Microeconomics studies the economic
decisions of the individual participants in the
economy.
 9. Economic Theories
• Instead of fact gathering, we use economic theories to
make sense of the complicated world: to show which
facts are relevant and how and why these facts are
related. An economic theory is a coherent and plausible
explanation of how economic facts are related.
Economic theory isolates the factors that are most
important in explaining an economic phenomenon and
yields hypotheses (or predictions).Theories are valuable
only if they are supported by facts.(Testing a Theory
example)
10. Positive versus Normative Economics

• Economics deals with both what is and what

should be. Positive economics studies what is
in the economy. Positive economics seeks to
formulate and test theories that explain
relationships among economic factors.
Normative economics deals with the way the
economic world should be.