Confronting Scarcity: Choices in Production

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“The first lesson of economics is scarcity – there is never enough of anything to fully satisfy all those who want it. The first lesson of politics

is to disregard the first lesson of economics.”-Thomas Sowell

Scarcity…a real bummer.

In the previous module, we learned that we face scarcity…but why?

Because the “stuff” we use to make goods and services are scarce.

And by “stuff”, we mean the ‘factors of production’.

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So what items are scare?

• Labor– For example. there are about 150 million workers in the

U.S. That may seem like a lot but it is a finite limit.

• Natural resources– The U.S. contains about 10 million sq km of land…again

a lot, but still limited.

• Capital– A fancy name for equipment, money or other items used

in production…it too is limited.

Resources used to make goods and

services are scarce.

There are three of these resources including:

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There is a fourth factor too

Entrepreneurial Ability

Ideas are also scarce. I wish I had more of them and I bet you do too!

The fourth factor may be the most important.

It is the idea…the spark…that combines the other three factors of production into something that

is useful.

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Economics, in a nut shell

Because these resources are scarce,

there are not enough of them to satisfy all of our

wants and needs.

That means we have to make choices, both as individuals and

as a society.

Economics is the study of those choices – It analyzes how we decide to use our

scarce resources.

Here we are seeing several Key Learning Outcomes. We now see that resources (such as land, labor,

capital and entrepreneurial ability)

are scarce and because of that we

have to make choices based on opportunity

cost!

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Because of scarcity, we have to make choices

In the last module, we developed a model to analyze these choices for an individual.

Let’s turn our attention to these choices from a societal

perspective.

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The economizing problem, from society’s point of view

We’ll now develop a model to explore choices from a societal perspective.

That model is called the Production Possibility Model.

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Let’s turn to society’s choices

In exploring the Production Possibility Model, well discuss choices between two goods: Guns and Butter.

Guns might represent spending on defense. You do want to protected, don’t you?

Economists love to use these as examples because they represent something bigger.

Butter might represent spending on welfare programs. You do

want to happy, don’t you?

Societies routinely have to make choices between these two important goods!

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The Production Possibilities Model can be used to analyze these choices

• We are discussing a hypothetical country• Fixed resources

– The supply of resources in that country (i.e. factors of production) used is limited in both quality and quantity

• Fixed technology– Technology in that country does not change

• Two good model– There are only two goods in the world (Ridiculous, I know but it keeps

things simple.)– Let’s call them “Guns and Butter”

To set up the Production Possibilities Model, let’s make some assumptions

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…Now for the model

Assume we are talking about a hypothetical country that can produce only two goods: Guns and butter.

Here are the production alternatives that they may face:

If this country makes nothing but butter, it can produce 20 units.

If this country makes nothing but guns, it can produce 4 units.

Or it, can produce some combination of

the two.

Note how these alternatives look like XY coordinates.

We can graph them!.

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The production possibility curve (or frontier)

Here we see this country’s

production alternatives displayed

graphically.

They, as a society, can choose to produce any

combination of guns and butter up

to points on this line.

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The production possibility curve (or frontier)

Any point inside the PPC means that resources are

unemployed.

When we hear “unemployment”, we think

of labor. But this could mean any resource.

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We can explore Opportunity Cost from society’s perspective too

Recall, opportunity cost is the most desired goods or services that are

forgone in order to obtain something else.

In this model, its the amount of one good that must be sacrificed to make one unit of another good.

In other words, “what does it cost to make a gun, in terms

of butter.”

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Let’s do the mathNotice…if you start at ‘A’ and want to add 1 gun you must

give up 2 butter

But in order to add another gun, you must give up 4

butter!

Study this pattern. I think you’ll see that each time you

add another good, its opportunity cost gets higher!

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Notice, each additional unit costs more!

This illustrates the Law of Increasing Opportunity Cost

The more of a product that is produced, the greater is its

opportunity cost

This holds true in reality too.

As we continue to plant in increasingly less fertile soil, crops

will not be as bountiful.

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But over time, can’t we make more? YES

Over time, we might expect a country’s Production

Possibility curve to expand.

That means that people can have more of both guns and

butter.

Here, the burdens of scarcity have been reduced.

These shifts could result from:

-Technological improvements

-Population growth or other resource growth (e.g. land)

-Improvements in productivity or efficiency

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Real world example: factors that affect the Production Possibility Curve

As a country’s population grows, your production possibility curve will likely increase (or shift out).

Most…but not all…countries experience population growth.

Here we see the U.S. population is growing by about 1% per year.

Some countries like Japan and Russia have been experiencing population declines. That does

not bode well for future economic growth!

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Current choices also affect the Production Possibility Curve

To start, note that we have new goods on these axis.

On the Y-Axis we have Capital Goods –those that are used to

make other things.

On the X-Axis we have Consumer Goods –those that are used right

away.

Imagine we have two countries that are the same in every aspect

expect they choose different points on their Production

Possibility Curves.

Country A chooses to make a lot of consumer goods.

Country B chooses to make a lot of capital goods.

Which will grow more quickly?Hopefully, you chose B. With more capital goods, it’s ability to produce more in the future will

increase and their PPC will shift out to reflect that!

This is an application of a Key Learning Outcome: Resources are scarce therefore individuals and society must make choices

based on opportunity costs…it is the economizing problem!

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In summary

Individuals and countries face scarcity and must make decisions on how to allocate their scarce resources.

These decisions require sacrifices of other things, referred to as opportunity costs.

Over time, our incomes, populations, and technologies might expand, which will

lessen the burden of scarcity.

Economics is the study of these decisions!

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