Economics, Scarcity, and Choice

This is Unit One of Principles of Microeconomics, part two of two: the production possibilities frontier, comparative advantage, and the tools for reading claims and diagrams. Carry the same idea as part one: every choice gives something up. Part one drew it for one person's budget. This part draws it for a whole society, uses it to explain why two producers trade, and closes by showing that four settings in this unit are one idea. By the end you will be able to read a frontier's slope as an opportunity cost and say why the curve bows. To classify a point as attainable, efficient or neither. To tell productive from allocative efficiency, and a move along the frontier from a shift of it. To find comparative advantage from a table. And to sort a positive claim from a normative one, and read a straight line's slope and intercept.

Five entries on the frontier: what it shows, why it curves, the two kinds of efficiency, growth, and reading a point against it.

The tradeoff for a whole society.

MIC 0023 The Production Possibilities Frontier

A production possibilities frontier shows the combinations of two goods a society can produce with the resources and technology it has now. Points on or inside the curve are attainable; points outside are not. The slope of the frontier is the opportunity cost of the good on the horizontal axis, measured in units of the other good.

Why the frontier is curved.

MIC 0024 Why the Frontier Bows Outward

The frontier bows outward because resources are not equally suited to every use, so each extra unit of one good costs more of the other than the last. The curve is flat near one end and steep near the other. That is the law of increasing opportunity cost, and it is what makes the frontier curve where a budget constraint stays straight.

What it takes to reach the frontier.

MIC 0025 Productive and Allocative Efficiency

Productive efficiency means no more of one good without less of the other, which holds at every frontier point. Allocative efficiency is the one frontier point society values most. Idle workers or idle factories put an economy inside the curve, and an economy can sit inside while fully employed if resources go where they lack comparative advantage. Both terms return in unit seven.

Moving the frontier itself.

MIC 0026 Growth Shifts the Frontier

There are two ways to get more of everything: move from inside the frontier onto it by ending waste, or shift the frontier outward through growth. More labor, more capital or better technology moves the curve out. Movement along the frontier is a tradeoff; a shift of the frontier is growth. Along against shift runs through every diagram in this course.

Reading a point against the frontier.

MIC 0027 On, Inside or Outside the Frontier

Given a frontier and a point, answer three questions in order. Is the point attainable? Points on or inside the curve are; points outside are not. Is it efficient? Only points on the curve are productively efficient; a point inside leaves resources idle or badly used. And what would move it? Ending inefficiency moves the point onto the curve; growth moves the curve. A country able to make forty thousand tons of grain or twenty thousand bicycles finds twenty thousand tons with eight thousand bicycles inside the curve, attainable and inefficient, and thirty-five thousand tons with eighteen thousand bicycles outside, not attainable now. Unattainable is not impossible forever, and an inside point is not a choice about priorities, since more of both is available.

Two entries on comparing producers: the two kinds of advantage, and finding the one that matters from a table.

Comparing two producers.

MIC 0028 Absolute and Comparative Advantage

Absolute advantage means making more of a good with the same resources. Comparative advantage means making it at a lower opportunity cost. A country that gives up less wheat than its neighbor to grow sugar grows the sugar. Comparative advantage can come from being poor at the alternative rather than good at the good itself, and unit sixteen works the numbers.

Finding it in a table.

MIC 0029 Comparative Advantage from a Table

To find comparative advantage from a table, compute each producer's opportunity cost of one unit of the first good by dividing the second good given up by the first good gained. The lower opportunity cost is the comparative advantage. Country A can make sixty shirts or twenty tablets and Country B twenty shirts or ten tablets, so a tablet costs A three shirts and B two: B specializes in tablets. Shirts reverse, a third of a tablet for A against half for B, so A specializes in shirts and the two trade. The trap is answering with absolute advantage: A makes more of both, yet B holds the comparative advantage in tablets, because ratios decide, not totals.

Two entries on the tools: which claims evidence can settle, and the two numbers that describe every straight line.

Which claims evidence can settle.

MIC 0030 Positive or Normative

A positive statement describes the world and can be tested; a normative statement says how the world ought to be and rests on values. To classify one, ask whether any measurement could show it false. If one could, it is positive; if none could, it is normative. A finding that a bridge would cost more than drivers save in time is positive. An argument that it should be built anyway because growth matters more is normative. A claim that raising the minimum wage reduces teenage employment is positive and contested, and the disagreement is about evidence. Positive does not mean true; the error is treating a normative claim as settled, or dismissing a positive one because its answer is unwelcome.

The shape every diagram takes.

MIC 0031 Reading a Straight Line

Two numbers describe a straight line. Written as y equals b plus m x, b is the vertical intercept and m is the slope, rise over run. A positive slope means the variables move together, a negative slope that they move oppositely, and zero a flat line. Changing b shifts the whole line without tilting it; changing m tilts it without moving the intercept. Take y equals four plus two x: at x of zero y is four, and each step in x raises y by two. Raise the four to seven and every point rises by three; raise the two to five and the line steepens from the same start. Shift and tilt answer different questions, and confusing them is the commonest error in reading a diagram.

One capstone entry, where this unit's idea shows up in four settings that turn out to be one.

The idea this unit keeps returning to.

MIC 0032 Where Opportunity Cost Keeps Turning Up

Opportunity cost appears in four settings that are one idea. In the budget constraint it is a price ratio: with income fixed, one more of a good means giving up some number of the other. In marginal analysis it is the test for one more unit, worth having only if its benefit covers what is given up. In the production possibilities frontier it is a resource ratio, the slope of the curve. And in comparative advantage it is the basis of trade: whichever producer gives up less to make a good should make it. The budget line is straight and the frontier bows, and the marginal rule asks the same question on either. One student, one afternoon: four hours of study, four hours at a job for sixty dollars, or four hours of rest. The cost of studying is the single best alternative given up, sixty dollars if the job is next best. Shrink to the margin, a fifth hour of study against a fifth of work, and the fifth hour adds less to the grade than the first while the job pays the same, so somewhere the student stops. Three cautions carry forward: only the next best alternative counts, the cost is often not money, and what is already spent is sunk and belongs to no decision still to be made.

Look at what you can now do. You can read a frontier's slope as the opportunity cost of the good on the horizontal axis, and say that it bows because resources are not equally suited to every use. You can classify a point: on the curve, attainable and efficient; inside, attainable but wasteful; outside, out of reach with today's resources. You can tell productive efficiency, any frontier point, from allocative efficiency, the one point society values most, and a move along the curve from a shift of it. You can find comparative advantage from a table by dividing, and you know that ratios decide it, not totals. And you can sort a positive claim from a normative one by asking whether evidence could settle it, and read a line's intercept and slope as a shift and a tilt. Unit two builds the market itself: demand, supply, equilibrium, and what happens when a price is held away from it.