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

Scarcity, Efficiency, and Scarcity, Efficiency, and Growth Growth

Econ Dept, UMR Presents

Starring Starring

N NThe 3 basic questions, and

The 3 basic questions, and

N NThe Production Possibilities

The Production Possibilities model model

Featuring Featuring

N N The invisible hand argument for coping

The invisible hand argument for coping with scarcity with scarcity

N 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

Part I Part I

N N The invisible hand argument for coping

The invisible hand argument for coping with scarcity with scarcity

N N Three basic questions

Three basic questions

N N Efficiency

Efficiency

Scarcity and Economic Scarcity and Economic Questions Questions

N N Scarcity

Scarcity -

• relationship between limited

relationship between limited 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 N Resources

Resources -

• the inputs used to make

the inputs used to make goods we want. Resources are limited goods we want. Resources are limited and this leads to scarcity and this leads to scarcity

R e s

• u

r c e s W a n t s

Scarcity Scarcity -

• relationship

relationship 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 l: land

Resources Resources -

• The inputs that

The inputs that are used to make things we are used to make things we want want

N N L: labor

L: labor-

• skilled and unskilled, also

skilled and unskilled, also includes entrepreneurial ability includes entrepreneurial ability

N N K: capital

K: capital-

• tools, machines, human

tools, machines, human capital (education) capital (education)

N N L: land

L: land-

• natural resources, even water

natural resources, even water

Scarcity implies the necessity Scarcity implies the necessity

• f Choice
• f Choice

N N We can

We can’ ’t have everything we want thus t have everything we want thus we must make choices we must make choices

N N Three Basic Questions

Three Basic Questions

O O What (and how much)

What (and how much)

O O How

How

O O For Whom

For Whom

Basic Economic Questions Basic Economic Questions dealing with Scarcity dealing with Scarcity

N N What do we want, and how much of

What do we want, and how much of each do we want? each do we want?

N 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?

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 N I want, we want

I want, we want

O 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,

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 N Who will be the teachers? The nurses

Who will be the teachers? The nurses 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 N What technologies should we use? Do

What technologies should we use? Do we import, or do we produce we import, or do we produce

• urselves?
• urselves?

N N What about the conflict between

What about the conflict between production techniques and production techniques and environmental goals? environmental goals?

Who shall enjoy what we have? Who shall enjoy what we have?

N N Those who are meritorious? Or, who

Those who are meritorious? Or, who work hard? Or, who inherit?, Or who work hard? Or, who inherit?, Or who are are “ “pure blooded pure blooded” ”? Or who are the ? Or who are the chosen few? Or who are educated? chosen few? Or who are educated?

N N Is there a necessary link between what

Is there a necessary link between what 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 N Should some things be available to all?

Should some things be available to all?

O 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 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 N Economists have ideas about both.

Economists have ideas about both.

N N How should they be answered?

How should they be answered?

O O Efficiently, say economists

Efficiently, say economists

O O Equitably, say others

Equitably, say others

O O Normative economics

Normative economics

N N How are they answered?

How are they answered?

O O Increasingly through markets, moderated

Increasingly through markets, moderated with government regulation with government regulation

O O A

A “ “mixed mixed” ” economy economy

O O Positive economics

Positive economics

Efficiency Efficiency

N 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 waste waste” ” but we use a definition more but we use a definition more precise precise

N N Efficiency: the inability to make

Efficiency: the inability to make someone better off without making someone better off without making someone else worse off someone else worse off

N N A change is efficient if the gainers could

A change is efficient if the gainers could 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 N The fact of scarcity implies we can’t

The fact of scarcity implies we can’t 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 N Efficiency means getting the most value

Efficiency means getting the most value from our limited resources from our limited resources

N N What we want should be accomplished

What we want should be accomplished at minimum opportunity cost at minimum opportunity cost

Efficiency and/or Equity Efficiency and/or Equity

N N Efficiency is the preview of economists,

Efficiency is the preview of economists, equity is for all of us to judge equity is for all of us to judge

N N Equity does not necessarily mean equality

Equity does not necessarily mean equality

O O Equality of opportunity is fair (equitable) for most

Equality of opportunity is fair (equitable) for most

• f us
• f us

O O Equality of income is probably not fair

Equality of income is probably not fair (inequitable) for most of us (inequitable) for most of us

N N If a change is efficient

If a change is efficient and and equitable, it equitable, it probably has already occurred probably has already occurred

N N Most policy debate is about change that

Most policy debate is about change that involves a tradeoff between these two involves a tradeoff between these two

• bjectives
• bjectives

Measurement of Efficient Changes Measurement of Efficient Changes

N N Review of definition: A change is efficient if the

Review of definition: A change is efficient if the gainers can compensate the losers and have gainers can compensate the losers and have something left something left

N N Gains are measured by the maximum persons

Gains are measured by the maximum persons who gain are willing to pay (WTP) for their who gain are willing to pay (WTP) for their gain gain

N N Losses are measured by the minimum people

Losses are measured by the minimum people who lose are willing to accept (WTA) in who lose are willing to accept (WTA) in compensation for their loss compensation for their loss

N N An efficient change requires

An efficient change requires Σ ΣWTP > WTP > Σ Σ WTA WTA

N N Notice an efficient change doesn

Notice an efficient change doesn’ ’t require losers t require losers 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 N Cooperation is more efficient that self

Cooperation is more efficient that self-

• sufficiency, so how do we insure

sufficiency, so how do we insure cooperation? cooperation?

N N Cooperation and the nature of man

Cooperation and the nature of man

O 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 motivated primarily by self motivated primarily by self-

• interest

interest

Self Interest and Efficiency Self Interest and Efficiency

N N Thomas Hobbs (1588

Thomas Hobbs (1588-

• 1679)

1679) leviathan leviathan, , 1651 1651

O “No arts, no letters, no society, and which is

worst of all, continual fear and danger of violent death, and the life of man solitary, poor, nasty, brutish, and short.”

O Advocated the submission to an absolute

monarch to avoid the inevitable conflict and chaos resulting from the uncontrolled pursuit of self-interest

Self Interest and Efficiency Self Interest and Efficiency

N Adam smith (1723-90) wealth of nations,

1776

O The invisible hand argument O Policy of laissez faire French “allow to act”

commonly taken to mean minimum government

The Invisible Hand Argument The Invisible Hand Argument

N N A wonderful thing, if true

A wonderful thing, if true

N N By allowing each person to pursue their

By allowing each person to pursue their

• wn interest, the general interest will be
• wn interest, the general interest will be

promoted promoted

N N Smith saw self

Smith saw self-

• interest leading to a

interest leading to a desirable outcome desirable outcome--

• -the wealth of the

the wealth of the nation nation

N N Hobbs saw self

Hobbs saw self-

• interest leading to a life

interest leading to a life that was nasty, brutish, and short that was nasty, brutish, and short

Basic tenets of the Smith argument Basic tenets of the Smith argument

N N The principle human motive is self

The principle human motive is self-

• interest

interest

N N The invisible hand of competition

The invisible hand of competition automatically transforms the self automatically transforms the self-

• interest of many into the common good

interest of many into the common good

N N Therefore, the best government policy

Therefore, the best government policy for the growth of a nation’s wealth is for the growth of a nation’s wealth is that policy which governs least ( that policy which governs least (laissez laissez faire faire) )

Criticisms of Smith’s Syllogism Criticisms of Smith’s Syllogism

N N Without government oversight, markets tend

Without government oversight, markets tend to be less competitive and monopoly power to be less competitive and monopoly power replaces competition replaces competition

N N Even with competition, markets fail when

Even with competition, markets fail when

O O There are significant external effects

There are significant external effects

O O Things we want do not have characteristics of

Things we want do not have characteristics of rivalry and excludability rivalry and excludability

O O Significant information externalities exist

Significant information externalities exist

N N Laissez faire

Laissez faire produces an intolerable degree of produces an intolerable degree of inequality inequality

Competition vs. Monopoly Competition vs. Monopoly Power Power

N N We will look at the inefficiencies of

We will look at the inefficiencies of monopoly power in chapters 9 and 10 monopoly power in chapters 9 and 10

N N Essentially the argument is that

Essentially the argument is that monopoly power skews the gains from monopoly power skews the gains from trade to the advantage of the party with trade to the advantage of the party with the power. Their gain is less than the the power. Their gain is less than the loss to the other party; thus monopoly loss to the other party; thus monopoly power is inefficient power is inefficient

Market failures with competition: Market failures with competition: external effects external effects (Ch. 8)

(Ch. 8)

N N Society gains when trade takes place

Society gains when trade takes place due to the self interest of the buyer and due to the self interest of the buyer and

• seller. Buyer gains, seller gains,
• seller. Buyer gains, seller gains,

therefore society gains. therefore society gains.

N N But some trade have effects on others

But some trade have effects on others not taken into account by the self not taken into account by the self interest of the buyer and seller interest of the buyer and seller

N N Thus competitive markets may not

Thus competitive markets may not generate the efficient level of trade generate the efficient level of trade

Market failures with competition: Market failures with competition: goods with nonrivalry and non goods with nonrivalry and non-

• excludability characteristics

excludability characteristics (Ch. 8)

(Ch. 8)

N N Some things we want are nonrival

Some things we want are nonrival--

• -they

they may be enjoyed by more than the buyer may be enjoyed by more than the buyer without cost to the buyer, e.G., Clean air without cost to the buyer, e.G., Clean air

N N In such cases, who wants to be the buyer

In such cases, who wants to be the buyer--

• let bill buy, and I’ll enjoy

let bill buy, and I’ll enjoy

N N Some things we want are nonexcludable

Some things we want are nonexcludable--

• people can not easily be denied access,

people can not easily be denied access, e.G., Salmon e.G., Salmon

N N In such cases, there tends to be over use

In such cases, there tends to be over use--

• -I

I better get mine before Betty gets hers better get mine before Betty gets hers

Market failures with competition: Market failures with competition: information asymmetry information asymmetry (Ch. 8)

(Ch. 8)

N N Smith’s argument supposes pursuit of

Smith’s argument supposes pursuit of self self-

• interest is efficient because buyer

interest is efficient because buyer and seller are equally informed and seller are equally informed

N N When one side or the other knows more

When one side or the other knows more about the trade there is information about the trade there is information asymmetry that may lead to inefficiency asymmetry that may lead to inefficiency

N N Government has a role in providing

Government has a role in providing sufficient information so self sufficient information so self-

• interest

interest action is informed self interest action is informed self interest

The End The End

Continue to Part 2