Lecture 3 Fundamentals of economics. The Production Possibilities Frontier and Circular Flow Model How scarcity , opportunity cost, & factors of production help societies answer the 3 basic questions of economics. Scarcity. If I tell you something is “scarce” what does that tell you?
The Production Possibilities Frontier and Circular Flow Model
How scarcity, opportunity cost, & factors of production help societies answer the 3 basic questions of economics
If I tell you something is “scarce” what does that tell you?
Guess what? The answer is none of the above!
Rocks and sand are scarce. So is air. So is trash.
Scarcityis a condition created by the fact that people have unlimited wants but resources are limited
Because of scarcity, when there are multiple uses for a resource people have to decide how to utilize the resource
The choice that is made always incurs an opportunity cost!
B. Why is air scarce if it seems so abundant?
What uses do we have for air?
A. “Spinning Garbage into Gold”
So how do people (including businesses, individuals, and government) answer the 3 questions in the face of scarcity?
Question 1: What to produce--Guns or Butter?
Why isn’t it an equal exchange (e.g. for every additional car factory produces, factory produces 1 less computer?)
Using a production possibilities schedule to predict opportunity costs
A B C D E
O/C of producing additional car measured in computers
What is the opportunity cost of producing 1 car instead of 0?
What is the opportunity costs of producing 3 cars instead of 2?
Why does it seem that the factory/society has to give up more and more computers just to produce 1 more car as you move from left to right on the schedule?
The interactions of individuals and businesses are what keep an economy strong
This model shows the interdependence of individuals and businesses that creates economic growth
* F.O.P. means _________________________________
Goods & Services
Money Payment ($)
If there were only a Product Market, eventually all goods would end up in the hands of households and all money in the hands of businesses leaving no more market.
Of course, the government could just print more money and give it to households to enable them to buy more, but what would be bad about that idea?