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This module introduces the notion of the market. We begin with a discussion of scarcity. To accomplish this, our primary objective this week will be to discuss the production possibilities frontier model. We will show how if an economy lies on the PPF then it makes choices that reflect the allocation of scarce resources to competing ends; hence, we live in a world of scarcity. Important terms for this chapter (6):
Scarcity: limitations on the resources used in production in the face of unlimited human wants.
Efficiency: This refers to the notion of the best allocation of scarce resources in the economy. Pareto optimality. Efficiency in exchange.
Opportunity Cost: the cost of the resources that is devoted to the production of one category of goods or services and therefore cannot be used in another activity. What do we give up by using a particular basket of resources?
Production Possibilities Curve: a model that relates the efficient allocation of resources to two different produced goods. Assumes:
- Full employment
- Fixed factor supplies at a point in time
- Constant technology.
Ceteris Paribus: All else held equal.
Economic Growth and the PPF: When the economy grows due to investment, changes in productivity, etc., the PPF shifts outward. See pg. 97 of the text for more on this.Remember: this is a process that deals with the long term, and which relies upon the process of capital accumulation. Keep this idea in the back of your mind as we go forward in the course, as it will become central to our analysis.
Here is a question for you? What happens if we do not lie on the PPF? That is, what if the assumption of full employment does not hold? As you think critically about this question, I want you to bring the concepts of opportunity cost and scarcity into the picture. The slideshow below should help you grapple with these issues.
