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“Scarcity”

Define the term “scarcity”. Explain how scarcity applies even in a “rich” country like the
United States.
Contrast positive economics and normative economics? Give an example of each.
The person who smokes cigarettes cannot possibly be thinking in terms of costs and
benefits because it has been proven that cigarette smoking increases one’s chances of
getting lung cancer. Evaluate the part of the statement that reads “the person who
smokes cigarettes cannot possibly be thinking in terms of costs and benefits”?
Describe how each of the following would affect the U.S. PPF:(a) a war takes place on U.S.
soil,
(b) the discovery of a new oil field,
(c) a decrease in the unemployment rate, and
(d) a law that requires individuals to enter lines of work for which they are not suited.
Explain the condition that gives a PPF a bowed outward (concave downward) shape.
Identify an example of this law

Sample Answer

Scarcity and Economics Concepts

1. Scarcity

Definition: Scarcity refers to the fundamental economic problem that human wants and needs are unlimited, while the resources available to satisfy them are limited. This means that we can’t have everything we want, and choices must be made.

Scarcity in the United States:

While the United States is considered a “rich” country, scarcity still applies:

Limited Resources: Even with abundant resources, there are limits to the amount of oil, clean water, arable land, and skilled labor available.
Unlimited Wants: People always desire more goods and services, whether it’s the latest smartphone, a larger house, or better healthcare.
Trade-offs: Scarcity forces individuals, businesses, and governments to make choices. For example, investing in defense might mean less funding for education or healthcare.

2. Positive vs. Normative Economics

Positive Economics:

Definition: Deals with objective and testable statements about economic phenomena. It focuses on what “is” or “has been” and can be verified with data.
Example: “Increasing the minimum wage leads to a decrease in low-wage employment.” This statement is testable and can be analyzed using economic data.

Normative Economics:

Definition: Involves subjective statements about what “should be” or “ought to be.” It expresses value judgments and opinions.
Example: “The government should raise the minimum wage to improve the lives of low-income workers.” This statement expresses a value judgment about what is considered “fair” or “desirable.”

3. Smoking and Cost-Benefit Analysis

The statement “the person who smokes cigarettes cannot possibly be thinking in terms of costs and benefits” is oversimplified.

Full Answer Section

While it’s true that smoking has well-documented health risks, individuals make decisions based on a complex interplay of factors:

Perceived Risks:People may underestimate the long-term health risks of smoking or prioritize immediate gratification over future consequences.
Addiction:Nicotine is highly addictive, and smokers may struggle to quit despite knowing the risks.
Social Factors:Smoking can be influenced by social norms, peer pressure, and marketing.
Personal Beliefs:Individuals may hold different beliefs about the risks of smoking or the effectiveness of quitting.

Therefore, it’s inaccurate to say that smokers are not engaging in cost-benefit analysis. Their decisions are influenced by a complex set of factors, not just a simple calculation of risks and benefits.

4. Effects on the U.S. PPF (Production Possibilities Frontier)

The PPF represents the maximum combinations of two goods that a country can produce with its available resources and technology.

(a) War on U.S. Soil:

Effect:A war would likely shift the PPF inward, representing a decrease in potential production due to resource allocation to military efforts, destruction of infrastructure, and loss of labor force.

(b) Discovery of a New Oil Field:

Effect:The discovery of a new oil field could expand the PPF outward, indicating increased production potential in the energy sector and potentially in related industries.

Effect:A decrease in unemployment would likely move the economy closer to the PPF, indicating increased resource utilization and output.

(d) Law Requiring Unsuitable Work:

Effect:This law would likely shift the PPF inward, as it would misallocate resources and lead to inefficient production.

5. Bowed Outward PPF

Condition: The bowed outward shape of a PPF is caused by the law of increasing opportunity cost.

Explanation: As a country produces more of one good, the opportunity cost of producing additional units of that good increases. This is because resources best suited for the first good are gradually allocated to producing the second good, leading to declining efficiency in the first good’s production.

Example: Imagine a country producing both wheat and computers. Initially, allocating resources to wheat production is relatively efficient. As more resources are shifted to computer production, the land and labor best suited for wheat production are allocated to computers, leading to higher opportunity costs in terms of lost wheat production.

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