Economics as the Science of

Scarcity and Choices

Muhammad Furqan
Lecturer in Economics
Govt. Degree College ,Thall
Scarcity, Choice, & Opportunity Cost
• Resources are scarce
– People have less resources than they
would like
• Choices
– Must be made among limited set of
possibilities
– Have more one thing means have less
something else (trade-off)

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Scarcity, Choice, & Opportunity Cost
• Labor – scarce
– Time limitations
– Number of skilled workers – limited
• Economics – study
– Use limited means to pursue unlimited
ends
• Opportunity cost of any decision
– Value of next best alternative - forgone

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 How much does it really cost?
• Principle of opportunity cost economics
– Options available
• Households & businesses
• Governments & entire societies
– Given - limited resources
– Study logic of
• How people can make optimal decisions
• From among competing alternatives

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 How much does it really cost?
• With limited resources
– Decision - have more of one thing
• Have less of something else
• Relevant cost of any decision
– Opportunity cost
• Value of next best alternative - given up
• Optimal decision making
– Based on opportunity-cost calculations

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 Opportunity Cost and Money Cost
• Market - functions well
– Goods with high opportunity costs have
high money costs
– Goods with low opportunity costs have
low money costs
– Might not be identical: Forgone wage of
college education
• Optimal decision
– Best serves objectives of decision maker
– Selected by explicit or implicit comparison
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with possible alternative choices
Scarcity and Choice for a Single Firm
• Outputs – produced by firm or economy
– Goods & services it produces
• Inputs - used by firm or economy
– Labor, raw materials, electricity, other
resources
– To produce outputs

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Scarcity and Choice for a Single Firm
• Example: One business firm – Farmer
– Fixed supply of inputs
– Given technology
– Produce two outputs
• Produce more of one output
– Produce less of the other

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Table 1
Production possibilities open to a farmer

Bushels of Soybeans Bushels of Wheat Label in Figure 1

40,000 0 A
30,000 38,000 B
20,000 52,000 C
10,000 60,000 D
0 65,000 E

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Scarcity and Choice for a Single Firm
• Production possibilities frontier (PPF)
– Different combinations of various goods
– Given
• Available resources
• Existing technology
– Slopes downward to right (Why?)
– Points: on or inside
• Attainable
– Points: outside
• Cannot be achieved 10
Figure 1
Production possibilities frontier for production by a
single farmer

A
40 Unattainable
B
Soybeans

region
30
Attainable C
20
region D
10
E
0 10 20 30 38 52 6065
Wheat

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Scarcity and Choice for a Single Firm
• Production possibilities frontier
– Bowed outward
• Resources (inputs) – specialized
• Slope of production possibilities frontier
– Opportunity cost
• Principle of increasing costs
– As production of a good expands
– Opportunity cost of producing another unit
• Generally increases
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Scarcity and Choice for Entire Society
• Economy – constrained by
– Resources
– Technology
• Production possibilities frontier – society
– Position & shape
– Determined by economy’s
• Physical resources, skills, technology
• Willingness to work
• Past: construction of factories, research, &
innovation
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Figure 3
Production possibilities frontier for the entire economy

700
Thousands of Automobiles per Year
B

600
D
500

400 E

G
300

200 F

100
C
0 100 200 300 400 500
14
Missiles per Year
 The Concept of Efficiency
• Efficiently produced output
– Given current technology
– Cannot increase output production
• Without increasing amount of inputs
• Or giving up a quantity of other output
• Efficiency = absence of waste
• Efficient economy
– Wastes none of available resources
– Produces maximum amount of output
– Given technology 15
Three Coordination Tasks - Any Economy
• Allocation of resources
– Society’s decisions
– Divide scarce input resources
– Among different outputs produced
– Among different firms / organizations
• Produce outputs

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Three Coordination Tasks - Any Economy
1. How to utilize resources efficiently
– Reach production possibilities frontier
2. What
– Which combination of goods to produce
– Select one point on production
possibilities frontier
3. To whom?
– Total output - distributed to each person

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1. Market - Efficient Resource Allocation
• Division of labor
– Break up a task
• Smaller, more specialized tasks
• Each worker – more adept at a particular job
• Example: Adam Smith’s pin factory
• Law of comparative advantage
– One country - production of particular good
• Relative to other goods
– If it produces that good less inefficiently
• Than it produces other goods
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– Compared with other country
 Summary

• Opportunity cost
• PPF: single firm vs. society
• Three tasks
– How (Production)
– Which (Exchange)
– To Whom (Distribution)

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Thank you

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