Economics and Scarcity

CHIONG, IZA FAITH M.

INSO, GWYNETH M.
Introduction to Economics
What is economics?
Economics is the survival in the face of scarcity. Economic deals
primarily with scarcity.
How should we allocate our limited resources to satisfy
seemingly unlimited human wants and need?
 Scarcity
Resources are the basis for producing the food, shelter, medical
care and luxury goods that we want.
Natural Resources (Land and timber) Human Resources (Labor)
Capital Goods Resources ( Factories & machineries)
These resources are scarce in the sense that there are not
enough of them to produce everything we need and desire.
What to produce and how to distribute this output to society’s
citizens are the most basic economic choices to be made.
 Production Possibilities
Easiest way to think about the problem of societal choice is by
looking at the basic economic concept and graph called
production possibilities.
It shows the maximum amounts of two different goods that
can possibly be produced during any particular period using
the society’s scarce resources.
 Assumptions
Because reality is complex, economists try to simplify it by making
assumptions about basic elements involved in analyzing an our economy.

1. All available resources are used fully – so that no workers are

unemployed, no factories sit idle, and so forth.
2. All available resources are used efficiently – efficiency means we use
our knowledge and tech to produce the maximum amount output
with these resources.
These 2 assumptions mean that our economy is doing the best that it
can – operating fully and efficiently.
 Assumptions
Because reality is complex, economists try to simplify it by making
assumptions about basic elements involved in analyzing an our economy.

3. The quantity and quality of available resources are not changing

during our period of analysis – means that over the current period,
workers don’t begin new training programs to be more productive
4. Technology is not changing during our period of analysis –
technological change is not occuring
5. We can produce only 2 goods with our available resources and
technology.
Production Possibilities Table
Production Possibilities Curve
Economic growth
It may occur if the quality or quantity of society’s resources
increases, or if technologies are developed to produce more
outputs with available resources.

This growth is reflected in an outward shift of the entire

production possibilities curve.
Production Possibilities Curve with
Economic Growth
 ECONOMICS & DISTRIBUTION
The reason why there is hunger in the world is not a problem of
production but of distribution. Poor people and poor government
lack the income to purchase the food that is produced.

On what basis should distribution choices be made? In a market-

based economy such as ours, the choices of distribution as well
as production are based primarily on prices. And prices are
determined by demand and supply.
Demand & Supply
Demand – the simple commonsense idea that people will be willing
and able to buy more of a good or service at low prices than at high
prices.
Law of Demand: P & Q demanded are negatively related, meaning: P
increases, Q decreases and vice versa.
Demand curve
– all possible combinations of
alternative prices and
quantity demanded assuming
that all factors except price
could affect quantity
demanded are held constant.
LAW OF DEMAND
- conditionalon all else being
equal, as the price of a good
increases, quantity demanded
decreases; conversely, as the
price of a good decreases,
quantity demanded
Demand & Supply
Supply - Law of Supply: P & Q supplied are positively
related.

Meaning, P & Q change in the same direction. If P increase

then Q increase and vice versa.
Supply Curve – a
graph of supply.
Indicates all possible
combinations of
quantity supplied and
alternative prices
with the assumption
that all other factors
affecting supply are
held constant.
 Surplus & Shortage
Shortage – only occurs when the market prices are below the equilibrium
price.
- average price would be pushed up, meaning price rises or
increases.
- when price increase: (1) buyers decrease Q demanded and (2)
sellers increase the Q they offer.
Surplus – the difference between Q supplied and the Q demanded or
unsold services in the market.
– only occurs when the market prices are above the equilibrium
price and causes price to fall or decrease.
 Application
Demand Curve shifts if the number of buyer changes, if the consumer’s
tastes change or if prices of other goods that they regard as substitutes
or complements change. And expectation of the future.
Substitute – butter and margarine
Complements – digital camera and memory cards
Supply Curve shifts if the number of seller changes or if the factors that
affect the producer’s cost change, technology used changes, changes in
price of resources.
Example: If technology improves, such that it is cheaper and easier to
produce a product, supply of the product will increase
Efficiency and Equity
Efficiency – a market should always be efficient in allocating and
distributing goods. Example: Goods &services are allocated to those
most willing to pay, thus, the market is an effective allocative device.
Without prices, products might go to people who do not strongly
need them and be wasted.

Equity – is a value laden concept. Example: A student may truly need

tutoring services but not able to afford them, thus , fail the course.

The market place is often efficient, but not necessarily equitable.

Market Failures and a Glimpse of the
Future
Despite the benefits of a market economy, most economists
recognize that the marketplace can also fail. The existence of
many market failures does not necessarily imply that the
marketplace itself is a failure. Rather, it points to ways that the
government may become involved in the marketplace to
assure that all societal needs are met.
Spillovers
This occur when come cost or benefit related to
production or consumption “spills over” onto people
not involved in the production or consumption of the
good.

Example: Pollution of our environment.

Inequity
Aside from discrimination, poverty, and inequality of
income distribution are also issues of equity. We may
argue that the inability of low-income people to meet
their basic needs is unfair. Housing, healthcare, and
social security also raise issues of equity.
Market Power
Ability of the supplier to influence the market price of its
product. It arises when a small number of suppliers
influence the market price of their products

Pure competition is an example of demand and supply of

tutoring services at a large university. There are so many
suppliers of tutoring services that no single tutor could
dictate the market price.
Instability
A topic of production possibilities and employment. The
factors that determine whether our nation will be on the
production possibilities curve or below are volatile. Thus, at
times we have very low employment and at other times we
have high employment.

Example: Prices & employment tend to fluctuate.