Scarcity, Efficiency, and Scarcity, Efficiency, and Growth Growth - PDF document

Econ Dept, UMR Presents Scarcity, Efficiency, and Scarcity, Efficiency, and Growth Growth

Starring Starring The 3 basic questions, and N The 3 basic questions, and N The Production Possibilities N The Production Possibilities N model model

Featuring Featuring N The invisible hand argument for coping The invisible hand argument for coping N with scarcity with scarcity N Three basic questions Three basic questions N N Efficiency Efficiency N N Production possibilities model Production possibilities model N N Marginal opportunity cost Marginal opportunity cost N

Part I Part I N The invisible hand argument for coping The invisible hand argument for coping N with scarcity with scarcity N Three basic questions Three basic questions N N Efficiency Efficiency N

Scarcity and Economic Scarcity and Economic Questions Questions N Scarcity Scarcity - - relationship between limited relationship between limited N resources and unlimited wants. Not all resources and unlimited wants. Not all human wants can be satisfied with human wants can be satisfied with goods or services goods or services N Resources Resources - - the inputs used to make the inputs used to make N goods we want. Resources are limited goods we want. Resources are limited and this leads to scarcity and this leads to scarcity

Scarcity - - relationship relationship Scarcity between limited resources and between limited resources and unlimited wants. Not all unlimited wants. Not all human wants can be satisfied human wants can be satisfied L: labor K: capital e s c r o u s e R W a n t s l: land

Resources - - The inputs that The inputs that Resources are used to make things we are used to make things we want want N L: labor L: labor- -skilled and unskilled, also skilled and unskilled, also N includes entrepreneurial ability includes entrepreneurial ability N K: capital K: capital- -tools, machines, human tools, machines, human N capital (education) capital (education) N L: land L: land- -natural resources, even water natural resources, even water N

Scarcity implies the necessity Scarcity implies the necessity of Choice of Choice N We can We can ’ t have everything we want thus ’ t have everything we want thus N we must make choices we must make choices N Three Basic Questions Three Basic Questions N O What (and how much) What (and how much) O O How How O O For Whom For Whom O

Basic Economic Questions Basic Economic Questions dealing with Scarcity dealing with Scarcity N What do we want, and how much of What do we want, and how much of N each do we want? each do we want? N How shall we get what we want? How shall we get what we want? N N Who shall enjoy what we have? Who shall enjoy what we have? N

What do we want, and how What do we want, and how much of each do we want? much of each do we want? N I want, we want I want, we want N O A chicken in every pot A chicken in every pot O O A car in my garage A car in my garage O O A garage A garage O O Peace and quiet Peace and quiet O O A lot of fun A lot of fun O O A good book A good book O O And so on, And so on, and on, and on, and on, and on, and on, O and on, and on, and on, and on, and on, and on and on

How shall we get what we How shall we get what we want? want? N Who will be the teachers? The nurses Who will be the teachers? The nurses N and doctors? Who will raise our kids? and doctors? Who will raise our kids? How will we provide for our old age? How will we provide for our old age? For the education of our children? For the education of our children? N What technologies should we use? Do What technologies should we use? Do N we import, or do we produce we import, or do we produce ourselves? ourselves? N What about the conflict between What about the conflict between N production techniques and production techniques and environmental goals? environmental goals?

Who shall enjoy what we have? Who shall enjoy what we have? N Those who are meritorious? Or, who Those who are meritorious? Or, who N work hard? Or, who inherit?, Or who work hard? Or, who inherit?, Or who are “ pure blooded ” ? Or who are the are “ pure blooded ” ? Or who are the chosen few? Or who are educated? chosen few? Or who are educated? N Is there a necessary link between what Is there a necessary link between what N we get and what we contribute? Should we get and what we contribute? Should there be such a link? there be such a link? N Should some things be available to all? Should some things be available to all? N O Basic medical service, food and shelter Basic medical service, food and shelter O O Basic education, telephone, postal service Basic education, telephone, postal service O O Internet access Internet access O O One trip to Disneyland, or a national park One trip to Disneyland, or a national park O per year per family per year per family

How should these questions be answered? How should these questions be answered? How are these questions answered? How are these questions answered? N Economists have ideas about both. Economists have ideas about both. N N How should they be answered? How should they be answered? N O Efficiently, say economists Efficiently, say economists O O Equitably, say others Equitably, say others O O Normative economics Normative economics O N How are they answered? How are they answered? N O Increasingly through markets, moderated Increasingly through markets, moderated O with government regulation with government regulation O A A “ mixed ” ” economy economy “ mixed O O Positive economics Positive economics O

Efficiency Efficiency N The The criterion used by economists criterion used by economists N N Common sense of the term is Common sense of the term is “ lack of “ lack of N waste ” ” but we use a definition more but we use a definition more waste precise precise N Efficiency: the inability to make Efficiency: the inability to make N someone better off without making someone better off without making someone else worse off someone else worse off N A change is efficient if the gainers could A change is efficient if the gainers could N potentially compensate the losers and potentially compensate the losers and still come out ahead still come out ahead

Why Efficiency Makes Sense Why Efficiency Makes Sense N The fact of scarcity implies we can’t The fact of scarcity implies we can’t N have everything we want, so what we have everything we want, so what we select should take into account what it select should take into account what it costs costs N Efficiency means getting the most value Efficiency means getting the most value N from our limited resources from our limited resources N What we want should be accomplished What we want should be accomplished N at minimum opportunity cost at minimum opportunity cost

Efficiency and/or Equity Efficiency and/or Equity N Efficiency is the preview of economists, Efficiency is the preview of economists, N equity is for all of us to judge equity is for all of us to judge N Equity does not necessarily mean equality Equity does not necessarily mean equality N O Equality of opportunity is fair (equitable) for most Equality of opportunity is fair (equitable) for most O of us of us O Equality of income is probably not fair Equality of income is probably not fair O (inequitable) for most of us (inequitable) for most of us N If a change is efficient If a change is efficient and and equitable, it equitable, it N probably has already occurred probably has already occurred N Most policy debate is about change that Most policy debate is about change that N involves a tradeoff between these two involves a tradeoff between these two objectives objectives

Measurement of Efficient Changes Measurement of Efficient Changes N Review of definition: A change is efficient if the Review of definition: A change is efficient if the N gainers can compensate the losers and have gainers can compensate the losers and have something left something left N Gains are measured by the maximum persons Gains are measured by the maximum persons N who gain are willing to pay (WTP) for their who gain are willing to pay (WTP) for their gain gain N Losses are measured by the minimum people Losses are measured by the minimum people N who lose are willing to accept (WTA) in who lose are willing to accept (WTA) in compensation for their loss compensation for their loss Σ WTP > Σ WTA An efficient change requires Σ WTP > Σ N An efficient change requires WTA N N Notice an efficient change doesn Notice an efficient change doesn’ ’t require losers t require losers N be compensated, just that they potentially could be compensated, just that they potentially could be compensated be compensated

How do we get what we want How do we get what we want Efficiently? Efficiently? N Cooperation is more efficient that self Cooperation is more efficient that self- - N sufficiency, so how do we insure sufficiency, so how do we insure cooperation? cooperation? N Cooperation and the nature of man Cooperation and the nature of man N O Man as a benevolent actor Man as a benevolent actor O O Man as a self Man as a self- -interested actor interested actor O O The economist view is that man is The economist view is that man is O motivated primarily by self- -interest interest motivated primarily by self