Scarcity Of Resources and Opportunity Cost Video Lecture | Microeconomics- Interaction between individual buyer-seller

in the immortal words of Mick Jagger you
can't always get what you want we have
unlimited wants but limited resources
and in an economic system we talk about
resources we're talking about land labor
capital and entrepreneurship the four
factors of production and because these
are limited it creates a scenario of
scarcity the lack of abundance of
resources which results because of
scarcity results in us incurring
explicit and implicit costs when we
produce and results in every decision we
make having some sort of trade-off for
example if I decide to manufacture this
marker it has explicit costs money I
have to pay land labor capital and
entrepreneurship to create this but
there are also implicit costs and those
are called opportunity costs I could
have instead of putting my resources
toward creating this marker or
manufacturing this marker I could have
manufactured three pencils I didn't that
is my implicit cost and giving up that
opportunity in order to manufacture this
marker so every decision we make has a
series of trade-offs and there's a model
in economics called the production
possibilities curve that illustrates
this concept of opportunity cost and
trade-off so let's take a look at that
and here's a constant production
possibilities curve and it compares to
goods so we've got good a and good B and
what this curve is saying is that every
point along this curve and it doesn't
really look like a curve it's a straight
line every point along this curve though
is our possible production it's where we
fully employ our resources it's what we
could possibly produce for example if we
put all of our limited resources in
producing good B and let's say these are
in billions of units we can potentially
produce 12 billion units of good B
that's the maximum capacity for
our economy if we put all of our limited
resources into producing good a we can
produce six billion units of good a we
obviously can't do both as we move from
one to the other there has to be a
trade-off because we only have limited
resources and we want to know what the
marginal cost or the really the marginal
opportunity cost is for every unit of
good a that we want what is the marginal
opportunity cost of good B what do we
have to give up in order to get more of
good eggs so let's say in our economy
we're using all of our limited resources
to produce good B and we're producing 12
billion units but people say society
says we want more good a so from going
from zero units of good a to 1 billion
units of good a because society demands
that what is going to be the trade-off
well according to this curve we're gonna
have to trade off two billion units of
good B if we want 1 billion units of
good a so that is the opportunity cost
we have to give up the possible
production of 2 billion units it could
be if we want 1 billion units of good a
it's constant because if we want one
more billion units of good a we have to
give up 2 more if we want one more of
good a with to give up 2 more of good be
one more of good any 2 more of good B
and so on and so forth that's why it's a
constant marginal opportunity cost for
every unit of good a we want in addition
we have to give up two billion units of
good B let's look at an example of an
increasing marginal opportunity cost
production possibilities curve and let's
look at two different goods we've got
toys and guns
so in this economy let's say we are
using all of our limited resources to
produce toys we are producing 12 billion
units of toys at full maximum production
using all of our resources for toys but
society then says
we want to produce some guns we probably
need some guns alright so we want to
know what the opportunity costs what is
the trade-off if we want to start
manufacturing guns so let's say we want
1 billion units of guns so we're going
from 0 to 1 billion units of guns this
curve shows us that it costs the
trade-off or opportunity cost is around
1 billion units of toys so if we want 1
billion units of guns we have to give up
the opportunity of manufacturing or
creating 1 billion units of toys ok but
let's say society says more guns please
all right so we go from 1 billion units
of guns to another billion units of guns
now we're manufacturing 2 billion units
of guns our trade off well we have to
trade off we have to go down to about
close to 8 billion units of toys and
from 11 to 8 that from from 1 to 2 it's
going to cost about 3 billion units of
toys in order to create that additional
billion units of guns it's an increasing
marginal opportunity cost and of course
if we go from 2 to our maximum 3 that's
going to cost the rest so from about 8
to about 0 so about 8 billion units of
guns it's going to cost to get to that 3
billion units of gun so you see that
that cost is increasing and the reason
why that happens is let's say for the
first if we move to 1 billion units of
guns if we were just making toys but we
start making guns maybe there's one
factory that has the correct tools and
labor to easily shift over from the toy
manufacturing to the gun manufacturing
well that's the low-hanging fruit
Factory we're going to use that one
first that one's going to switch over
first if society says we want more guns
as we get as we need I want more and
more guns it's going to be harder for
the factories for our limited resources
here to make a quick and easy shift over
to producing guns which gives us our
increasing marginal opportunity cost as
we move
for their move farther into wanting more
guns let's look at a few scenarios
involving production possibilities curve
x' and how they can change and looking
at how this illustrates an increasing
economy or a growing economy and/or a
shrinking economy and let's start we're
going to look at bebe here as our
starting point for each one of these
scenarios so our curve bebe is always
the beginning point and we will look at
technology natural resources and
government government restrictions
and/or policies and how that can affect
our economy and our production
possibilities so we're starting at bebe
and let's say that our capital goods
here are machinery like we can
manufacture and put our limited
resources into manufacturing machinery
or we can our consumer goods let's say
shoes all right so we're either
producing shoes or machinery let's say
technology is discovered that makes shoe
production much more efficient just shoe
production it doesn't translate into
other manufacturing so we're going to
see a shift in the curve from B B to B D
so just the consumer goods just our shoe
manufacturing will shift out and we'll
be able to produce more shoes given this
given our limited resources so
technology can have an effect a
specifically efficiency of production it
can increase efficiency of production
now let's say the technology was
developed some sort of software or
hardware for computers that makes all of
manufacturing more efficient we would
see then a shift from the be B curve we
would see a complete shift out to see C
because all of manufacturing has become
more efficient through this technology
let's talk about natural resources in an
example
one one way of getting at more resources
in order to shift our production
possibilities out and grow our economy
is through trade which we will deal with
later but another way is to find natural
resources in the country for example we
find oil in Alaska decide to drill it
and make that available to our economy
that fuel source is going to have a
positive impact on all of manufacturing
and it's going to move our curve from B
B if that's where we currently are then
the new fuel sources come into the
economy which we didn't have before new
resources it could shift our curve out
to see see growing our economy now if we
have government restrictions or
government policies that come into place
like the EPA for example puts
restrictions on manufacturing the EPA
has a new restriction that says some
sort of manufacturing process or
chemical is no longer allowed to be used
for long term environmental protection
reasons we may go from B B where we
there are possibilities here for
production
it may actually shrink our economy and
we may end up at a a slowing down the
production of our economy or the
possible production in our economy in
order for a long term view of saving the
environment now let's talk about X and y
as well now X is outside of our frontier
if we are currently operating at B be
it's way outside of a frontier we're not
there yet we want to get there we want
to grow our economy through technology
and getting more resources but we're not
quite there so it's outside of our
frontier why is well inside the curve it
means that our resources are four
factors of production are not operating
at full employment and as as this gets
further in if we're operating at B B
this is pretty far in there that could
be a scenario like the Great Depression
when there's high unemployment and a lot
of factories and businesses are not
producing at full employment
a final look here we've got capital
goods again and consumer goods the goal
is to figure out ways through technology
and resources to grow our economy and
then decide as a society what we value
here do we value consumer goods are we
going to make the choice to be at the
point along this curve where where could
where we're producing more consumer
goods or do we choose to produce more
capital goods using our scarce resources
it's a constant debate where we should
be along our current production
possibilities curve with every decision
having an opportunity cost and for every
decision we have to make constant
trade-offs