Chapter-2-The-fundamental-Economic-Problem-Scarcity.pptx

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1. The Fundamental ECONOMIC PROBLEM: SCARCITY DonneL James B. Palcone, MBA, LPT ECON 101 MICROECONOMICS

2. Lesson Objectives The students should be able to understand and apply the following concepts in economics; 01 Scarcity, Choice, Opportunity cost 02 Opportunity cost and Money Cost 03 Optimal Choice 04 The Production possibilities Frontier 05 The Principle of increasing cost 06 The three coordination tasks of any economy 07 Concept of Efficiency 08 Comparative advantage 09 Market exchange 10 Distribution of economy’s outputs

3. GUESS THE GIBBERISH 3 A gibberish game  involves deciphering a phrase that sounds like nonsense but actually represents a common, real phrase when read out loud

4. GUESS THE GIBBERISH 4 Ewe night ted king dumb

5. GUESS THE GIBBERISH 5 UNITED KINGDOM

6. GUESS THE GIBBERISH 6 Tay cove achea shun

7. GUESS THE GIBBERISH 7 TAKE A VACATION

8. GUESS THE GIBBERISH 8 Han Dover ThemeHoney

9. GUESS THE GIBBERISH 9 HAND OVER THE MONEY

10. GUESS THE GIBBERISH 10 Clue tin furry

11. GUESS THE GIBBERISH 11 GLUTEN FREE

12. GUESS THE GIBBERISH 12 Essay madder rough act

13. GUESS THE GIBBERISH 13 AS A MATTER OF FACT

14. GUESS THE GIBBERISH 14 High dance eek

15. GUESS THE GIBBERISH 15 HIDE AND SEEK

16. GUESS THE GIBBERISH 16 Men him hum owe age

17. GUESS THE GIBBERISH 17 MINIMUM WAGE

18. GUESS THE GIBBERISH 18 Croupe miss itch

19. GUESS THE GIBBERISH 19 GROUP MESSAGE

20. GUESS THE GIBBERISH 20 Ab pill choose

21. GUESS THE GIBBERISH 21 APPLE JUICE

22. GUESS THE GIBBERISH 22 Bay purse draws

23. GUESS THE GIBBERISH 23 PAPER STRAWS

24. The Fundamental Economic Problem SCARCITY Scarcity means that resources are limited, while wants and needs are unlimited. This means we can't have everything we want.  Impact:  Scarcity forces us to make choices. We must decide how to allocate our limited resources to satisfy our most pressing needs and wants.  Examples: Time:  We have a limited amount of time each day, so we must choose how to spend it. Money:  Our income is limited, so we must decide how to allocate our money among different goods and services. Natural Resources:  Resources like oil, water, and land are finite, and their overuse can lead to scarcity.

25. The result of Scarcity CHOICE Because of scarcity, we are constantly faced with choices. We must decide which needs and wants to satisfy and which to forgo. Impact:  Every choice we make comes with consequences. We must weigh the benefits and costs of each option to make the best decision for ourselves. Examples: Buying a car:  Do you buy a new car or a used car? A fuel-efficient car or a powerful SUV? Each choice has different costs and benefits. Investing money:  Do you invest in stocks, bonds, or real estate? Each investment has different risks and potential returns.

26. The Value of what we give up OPPORTUNITY COST   The value of the next best alternative that is forgone when making a choice . It's the cost of what we give up by choosing one option over another. Impact:  Understanding opportunity cost helps us make more informed decisions. It forces us to consider the full cost of our choices, not just the immediate cost. Examples: Going to college:  The opportunity cost of going to college is the income you could have earned by working instead. Starting a business:  The opportunity cost of starting a business is the salary you could have earned by working for someone else.

27. Money Cost Opportunity Cost Example: Fran's Fountain Pens wants to expand and add a new location because their business is doing well. If they rent a storefront on Main Street, the rent is $3,000 per month. A storefront on Maple Street costs $2,500 per month in rent. According to their calculations, they'd attract the same number of customers in either location, so the opportunity cost of renting on Main Street is $500.  The  explicit, out-of-pocket expense  associated with a choice . It's the actual amount of money you pay for something. The value of what you forgo when you give up one choice in favor of another. Opportunity cost = Cost of alternative outcome - cost of chosen outcome

28. Optimal CHOICE Example: Imagine you're deciding whether to buy a new car or keep your old car. Objective:  To have reliable transportation. Constraints:  Your budget, the cost of car insurance, and the time you have available to research and purchase a car. Alternatives:  Buying a new car, buying a used car, or continuing to drive your old car. Decision-Making Process:  You could use a cost-benefit analysis to compare the costs and benefits of each option, considering factors like purchase price, maintenance costs, fuel efficiency, and safety features. You might also consider the opportunity cost of spending money on a car versus investing it elsewhere. An optimal choice is the  best possible decision  an individual or firm can make given their  constraints  and  objectives . It's the choice that maximizes their  utility  (satisfaction) or  profit , considering all relevant factors.

29. PRODUCTION POSSIBILITY FRONTIER (PPF) The production possibility frontier (PPF) is a curve on a graph that illustrates the possible quantities that can be produced of two products if both depend upon the same finite resource for their manufacture. The PPF is also referred to as the production possibility curve. The PPF is the area on a graph representing production levels that cannot be obtained given the available resources; the curve represents optimal levels. Here are the assumptions involved: A company/economy wants to produce two products. There are limited resources. Technology and techniques remain constant. All resources are fully and efficiently used.

30. PRODUCTION POSSIBILITY FRONTIER (PPF) For instance, producing five units of wine and five units of cotton (point B) is just as attainable as producing three units of wine and seven units of cotton. Point X represents an inefficient use of resources, while point Y represents a goal that the economy simply cannot attain with its present levels of resources. As we can see, for this economy to produce more wine, it must give up some of the resources it is currently using to produce cotton (point A). If the economy starts producing more cotton (represented by points B and C), it would need to divert resources from making wine and, consequently, will produce less wine than it is producing at point A. Moreover, by moving production from point A to B, the economy must decrease wine production by a small amount compared to the increase in cotton output. But if the economy moves from point B to C, wine output will be reduced by about 50%, while the cotton output only increases by about 75%. Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy

31. THE PRINCIPLE OF INCREASING COST “Why More of One Good Means Less of Another?” The principle of increasing costs is a fundamental concept in economics that explains the shape of the Production Possibilities Frontier (PPF). It states that as an economy produces more and more of one good, the opportunity cost of producing an additional unit of that good increases. This means that the more we produce of one good, the more we have to give up of another good .

32. THE PRINCIPLE OF INCREASING COST Understanding Increasing Costs: Resource Specialization:  Resources are not perfectly interchangeable. Some resources are better suited for producing certain goods than others. As we specialize in producing more of one good, we must use resources that are less efficient for that purpose, leading to higher opportunity costs. Diminishing Returns:  As we produce more of a good, we may encounter diminishing returns to resources. This means that each additional unit of input produces less additional output. To produce more, we need to use more and more resources, making the opportunity cost of additional units higher.

33. The three coordination tasks of any economy 1. What to produce? Resource Allocation:  An economy must decide which goods and services to produce and in what quantities. This involves allocating scarce resources (land, labor, capital) to different production activities. Consumer Preferences:  The economy needs to consider consumer preferences and demand for different goods and services. Technological Advancements:  It also needs to consider the availability of technology and the potential for innovation in production processes. Example:  A developing country might prioritize producing basic necessities like food and clothing, while a developed country might focus on advanced technology and services.

34. The three coordination tasks of any economy 2. How to Produce? Production Methods:  An economy must determine how to produce goods and services efficiently, using the available resources and technology. This involves making choices about production processes, labor organization, and capital investment. Efficiency and Productivity:  The goal is to maximize output and minimize waste, leading to higher productivity and economic growth. Example:  A manufacturing company might choose between using manual labor or automated machinery, considering the cost of each option and the relative productivity of each method.

35. The three coordination tasks of any economy 3. For Whom to Produce? Distribution of Goods and Services:  An economy must decide how to distribute the goods and services it produces among its population. This involves considering factors like income, wealth, and social welfare. Equality and Fairness:  The distribution system should be fair and equitable, ensuring that everyone has access to basic necessities and opportunities to improve their standard of living. Example:  A government might implement policies like progressive taxation or social safety nets to redistribute income and ensure basic needs are met for all citizens.

36. THE CONCEPT OF ECONOMIC EFFICIENCY Economic efficiency is when all goods and factors of production in an economy are distributed or allocated to their most valuable uses and waste is eliminated or minimized. A system is considered economically efficient if the factors of production are used at a level at or near their capacity. In contrast, a system is considered economically inefficient if available factors are not used to their capacity. Wasted resources and deadweight losses may cause economic inefficiencies. Example:  The development of the internet and e-commerce has significantly increased efficiency in the retail sector. Online retailers can reach a larger market with lower overhead costs compared to traditional brick-and-mortar stores. Consumers benefit from a wider selection of products and lower prices. This technological advancement has led to a more efficient allocation of resources and a higher level of economic output.

37. COMPARATIVE Advantage David Ricardo and the Birth of Comparative Advantage The concept of comparative advantage is most closely associated with the English economist David Ricardo , who developed the theory in his 1817 book "On the Principles of Political Economy and Taxation." Ricardo's work demonstrated that even if one country is more efficient at producing all goods, both countries can still benefit from trade by specializing in the goods where they have a comparative advantage. Beyond Theory: Real-World Applications The theory of comparative advantage has significant real-world implications: International Trade:  It helps explain why countries engage in international trade and why free trade policies are generally beneficial. Economic Development:  It provides a framework for countries to specialize in industries where they have a comparative advantage, leading to economic growth. Business Strategy:  Companies can use the concept to identify their competitive advantages and focus on producing goods or services where they have the lowest opportunity cost.

38. COMPARATIVE Advantage in Microeconomics At the individual level, comparative advantage helps explain why people specialize in certain activities or professions. For example, imagine a person skilled in both cooking and writing. They might have a comparative advantage in cooking if they can prepare a meal in less time than it takes them to write a short story. This means they give up less writing time when focusing on cooking. Example: A tailor can sew 10 shirts or 5 pants in a day. A carpenter can make 1 chair or 10 tables in a day. If they specialize based on comparative advantage, who should make pants? At the firm Production, Comparative advantage is also a key concept in understanding how firms make production decisions. A firm might have a comparative advantage in producing a particular good or service if it can do so at a lower opportunity cost than its competitors. This could be due to factors such as: Specialized Resources Economies of Scale   Learning by Doing

39. Market Exchange Market exchange is a fundamental concept in microeconomics that describes the process by which goods and services are exchanged between buyers and sellers in a market. It's the core mechanism through which resources are allocated, prices are determined, and value is created in a market economy. Example: A farmer trades 5 kilos of corn for 3 kilos of fish with a fisherman. Voluntary Transactions:  Market exchange is based on voluntary transactions where both the buyer and seller believe they are better off after the exchange. Price Mechanism:  The price of a good or service acts as a signal, reflecting the relative scarcity and value of that good Demand and Supply:  Market exchange is governed by the forces of demand and supply. Demand represents the willingness and ability of buyers to purchase a good at different prices, while supply represents the willingness and ability of sellers to produce and offer a good at different prices.

40. Examples of Market Exchange Buying Groceries:  When you go to the grocery store, you're engaging in market exchange. You choose the products you want, pay a price determined by supply and demand, and the store receives revenue for the goods. Hiring a Tutor:  A student seeking tutoring services engages in market exchange with a tutor. They agree on a price for the tutoring sessions, and the tutor provides their services. Selling a Used Car:  pay a price determined by supply and demand, and the store receives revenue for the goods. Hiring a Tutor:  A student seeking tutoring services engages in market exchange with a tutor. They agree on a price for the tutoring sessions, and the tutor provides their services.

41. Distribution of Economy’s outputs The distribution of an economy's outputs refers to how the goods and services produced in an economy are allocated among different individuals, households, and groups within society. It's a crucial aspect of economic analysis, as it determines who benefits from the fruits of economic activity and how resources are distributed within a society. 1. Market-based distribution A pair of shoes costs ₱2,000. Only those who can afford to pay the price can buy it. 👉 Output is distributed based on ability to pay . 2. Government allocation / Public goods The government provides free public education to all children. 👉 Output is distributed equally to everyone regardless of income . 3. Need-based distribution A relief center gives free rice and canned goods to families affected by a typhoon. 👉 Output is distributed based on need . 4. Contribution/Productivity-based distribution A company pays its workers different wages: engineers earn ₱40,000 while clerks earn ₱15,000. 👉 Output (income) is distributed based on contribution and skills .

42. Key aspects of Output distribution 1. Factors of Production and Income Distribution: Land, Labor, Capital and Entrepreneurship 2. Distribution by Income Groups: 3. Distribution by Sector: Primary Sector: Agriculture, mining, forestry, fishing. Secondary Sector: Manufacturing, construction, energy production. Tertiary Sector: Services, retail, finance, healthcare, education. 4. Examples of Output Distribution: (Developed and D eveloping countries) 5. Factors Influencing Output Distribution: Government policies, Market forces, Globalization) 6. Implications of Output Distribution: Economic growth, social welfare, political stability

43. Identify the economic concept being described. The fundamental economic problem that arises because resources are limited but human wants are unlimited. The next best alternative that is given up when a choice is made. The actual amount of money spent in obtaining a good or service. The decision that provides the greatest benefit or satisfaction given limited resources. A graph that shows the maximum possible combinations of two goods or services that can be produced using available resources and technology.

44. Identify the economic concept being described. The fundamental economic problem that arises because resources are limited but human wants are unlimited. SCARCITY The next best alternative that is given up when a choice is made. OPPORTUNITY COST The actual amount of money spent in obtaining a good or service. MONEY COST. The decision that provides the greatest benefit or satisfaction given limited resources. OPTIMAL CHOICE. A graph that shows the maximum possible combinations of two goods or services that can be produced using available resources and technology. PRODUCTION POSSIBILITY FRONTIER (PPF)

45. THANK YOU! "The first rule of economics is scarcity: there is never enough of anything to fully satisfy all those who want it." - Thomas Sowell ECON 101 BASIC MICROECONMICS