Transcript SESSION 3

SESSION 3:
LIMITED RESOURCES & UNLIMITED WANTS
AND OPPORTUNITY COST & TRADE-OFFS
Talking Points
Limited Resources & Unlimited Wants
1. There are four types of productive resources used to produce goods and services:
human, capital, natural, and entrepreneurship.
Each type is available in limited amounts to society; in other words, resources are
scarce.
Session 3: Talking Points, Cont’d
Limited Resources & Unlimited Wants
2. Human (workers) and capital (machines/tools) resources are the “transformers” in
the production process.
3. Natural resources provide
a. the raw materials acted upon in production
b. the energy to fuel human and capital resources
c. direct goods to society, such as UV protection, natural beauty, wildlife
habitat, and other ecological services.
4. Someone must coordinate production. In market economies this is done by
entrepreneurs; in command economies it is done by central planners.
Session 3: Talking Points, Cont’d
Limited Resources & Unlimited Wants
5. Money is not a productive resource (currency and coins are not used to
produce anything).
6. Society’s wants are unlimited, making its desire for goods and services to satisfy
those wants also unlimited.
7. Productive resources are scarce because there are not enough of them to
produce the unlimited amounts of goods and services that society wants. This is
the fundamental economic problem (Step 1 of the PACED model) faced by
society.
Session 3: Talking Points, Cont’d
Limited Resources & Unlimited Wants
8. An economic system must answer three fundamental questions:
a. The allocation question: What goods and services will be produced and in
what quantities?
b. The production question: How will the goods and services be produced?
c. The distribution question: For whom will the goods and services be
produced?
Session 3: Talking Points, Cont’d
Opportunity Costs & Trade-Offs
1. The next step in addressing society’s fundamental economic problem is to list the
possible alternatives (Step 2 of the PACED model). Although societies want a large
variety of goods, for simplicity’s sake, let’s assume that we have a society that wants
only two goods.
2. A production possibilities curve (PPC) shows the various combinations of
these two goods a society can produce given its available productive
resources and current technology (methods of converting resources into
goods and services); that is, it shows the alternative mixes of goods that
are possible to produce at this time.
3. To construct a PPC, first find the “all-or-nothing” extremes and then ask
what is the maximum amount of one good that could be produced given a
certain amount of the other good to find the remaining combinations.
Session 3: Talking Points, Cont’d
Opportunity Costs & Trade-Offs
4. Combinations outside the PPC are not possible to produce at this time,
while those inside the PPC are possible but do not require the use of all
of society’s resources.
5. The opportunity cost of a choice is the most-valued alternative that
must be given up (it is real goods and services and/or real activities, not simply
money or time) when a decision is made.
6. The opportunity cost along a PPC is the amount of one good that must be given
up to get more of the other.
7. If all units of resource are homogeneous (equally productive), the
opportunity cost is the same for all units of a good (resulting in a straightline PPC).
Session 3: Talking Points, Cont’d
Opportunity Costs & Trade-Offs
8. If units of a resource are heterogeneous (not equally productive), the
opportunity cost rises as more of a good is produced (resulting in a bowshaped PPC).
9. The simple message of the PPC is that there is a trade-off: Getting
more of one thing (one good) means getting less of something else
(another good).
Visual 3A: Limited Resources and Unlimited Wants
Visual 3B: The Pig Principle