Transcript No Slide Title

Bellringer
• What is the primary purpose of job
specialization?
• A) regional self-sufficiency
• B) increased consumer income
• C) increased marginal utility
• D) increased efficiency and productivity
Opportunity Cost
• Every decision we make has costs
– What are some examples of this?
• Trade-off
– When one good is sacrificed for another
– E.g., buying a Braves ticket
• Trade-off=anything else that can be done with the money/time
(dinner, gas for your truck, tickets to something else, studying, etc.)
• Opportunity Cost
– The value of the next best alternative that is given up to
obtain the preferred item
– E.g., if the choice for buying the ticket was b/t a Braves
game and a Falcons game, and you chose the Braves ticket,
what is the opportunity cost?
Graphing Opportunity Costs
• In economics, we are going to use a lot of
graphs and models to represent information
• The first graph we will see is the Production
Possibility Curve (PPC)
– This is a simplified scenario which shows an
economy that produces only two goods
– When we analyze the production decisions in
this economy, we can find out opportunity costs
The Production Possibilities
Frontier
• The production possibilities frontier is a
graph that shows the combinations of output
that the economy can possibly produce
given the available factors of production
and the available production technology.
Graph of PPC
• Copy from board below (Points A, B, and C):
Graph of PPC
• Copy from board below (Point D & E):
The Production Possibilities Frontier
Quantity of
Computers
Produced
3,000
C
A
2,200
2,000
1,000
0
B
Production
possibilities
frontier
D
300
600 700
1,000
Quantity of
Cars Produced
The Production Possibilities
Frontier
• Concepts illustrated by the production
possibilities frontier
–
–
–
–
Efficiency
Trade-offs
Opportunity cost
Economic growth
Shifting the PPC
• The following will cause the PPC to shift:
– Change in technology
– Change in resources
Graph of PPC—Shift in Curve
• Copy from board below:
A Shift in the Production Possibilities Frontier
Quantity of
Computers
Produced
4,000
3,000
2,300
2,200
0
G
A
600 650
Quantity of
1,000 Cars
Produced
You must make yourself
worse off in the short run
to make yourself better
off in the long run.
Study
Leisure
Peanuts
Oranges
Capital
Goods
Consumption
Goods
Theme Song:
http://www.youtube.com/watch?v=H8Uf8Z
j9W24&feature=related
3 Hour Tour
http://www.bradyworld.com/cover/minnow.jpg
The ship set ground on the shore of this
uncharted desert isle
http://images.google.com/imgres?imgurl=www.timvp.com/gillign2.jpg&imgrefurl=
http://www.timvp.com/gilligan.html&h=270&w=295&prev=/images%3Fq%3Dgilligan%2527s%2Bisland%
26svnum%3D10%26hl%3Den%26lr%3D%26ie%3DUTF-8%26oe%3DUTF-8
When Stranded on a Deserted
Island What do you “Need?”
BUT YOU REALIZE, DOING
THIS IS GOING TO GET REAL
OLD, REAL FAST!
So what should I do?
http://www.coracle-fishing.net/corac-pix2/net-11x.jpg
http://www.tasaday.com/images/_sl-003.jpg
All the while,
making myself
worse off
http://www.surfingforlife.com/g/cult_b10.jpg
http://www.zeroimpactproductions.com/seine-over-freezer.jpg
http://www.riveroflifefarm.com/images/lodging/th/th2/tree-house-summer.jpg
Capital
Goods
By producing more capital goods
Consumption
relative to consumption goods,
Goods
the economy’s Production-possibilites
curve to shifts OUTWARD and shifts outward FASTER.
Capital
This is GOOD!
Consumption
If the PP shifts outward
Capital
This is BAD!!
Consumption
If the PP shifts inward
Capital
Goods
There are five variables that
shift the PP outward--
Consumption
Goods
Five Variables that Shift the PP Outward:
1. Increase the productive labor force
(productivity).
2. Increase the quantity and quality of natural
resources.
3. Increase the quantity and quality of capital.
4. Increase health and education.
5. Increase technology.
What did Japan do on
December 7, 1941 ?
Capital
Japan 1941
What capital
goods
did Japan
produce
in 1940?
rice
Consumption
What consumption
goods did it produce?
What did the U.S. do to
Japan for this dirty deed?
Capital
Japan 1945
rice
Consumption
http://www.archives.gov/digital_classroom/history_day/bright_ideas/images/nagasaki.gif
morning of August 6, 1945
Nagasaki
http://www.nhc.rtp.nc.us:8080/tserve/nattrans/ntimages/hiroshima.jpg
Hiroshima
11:02 am, August 9, 1945
Capital
What do you think happened
to Japan’s productive labor
force?
Japan 1945
rice
Consumption
Capital
What do you think happened
to the quantity and quality of its
natural resources?
Japan 1945
rice
Consumption
Capital
What do you think happened to
the quantity and quality of
its capital stock?
Japan 1945
rice
Consumption
Capital
What do you think happened to
its health and education?
Japan 1945
rice
Consumption
http://hiroshima.tomato.nu/image/park_ma/e11-10.jpg
Capital
What do you think happened to
its technology?
Japan 1945
rice
Consumption
Capital
What happened to Japan’s
PP?
Japan 1945
rice
Consumption
Capital
Goods
Consumption
Goods
http://www.ellsworthamerican.com/archive/news2000/08-24-00/news3_08-24-00b.gif
The Classic PPC Example
Guns
Military
Butter
Consumption goods
PPF Example
 Producing one computer requires 100 hours labor.
 Producing one ton of wheat requires 10 hours labor.
Employment of
labor hours
Production
Computers
Wheat
Computers
Wheat
A
50,000
0
500
0
B
40,000
10,000
400
1,000
C
25,000
25,000
250
2,500
D
10,000
40,000
100
4,000
E
0
50,000
0
5,000
PPF Example
Production
Point
on
Comgraph puters Wheat
A
500
0
B
400
1,000
C
250
2,500
D
100
4,000
E
0
5,000
Wheat
(tons)
6,000
5,000
E
D
4,000
3,000
C
2,000
B
1,000
A
0
0
100 200 300 400 500 600
Computers
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
53
ACTIVE LEARNING
1
Points off the PPF
A. On the graph, find the point that represents
(100 computers, 3000 tons of wheat), label it F.
Would it be possible for the economy to produce
this combination of the two goods?
Why or why not?
B. Next, find the point that represents
(300 computers, 3500 tons of wheat), label it G.
Would it be possible for the economy to produce
this combination of the two goods?
ACTIVE LEARNING
Answers
 Point F:
100 computers,
3000 tons wheat
 Point F requires
40,000 hours
of labor.
Possible but
not efficient:
could get more
of either good
w/o sacrificing
any of the other.
1
Wheat
(tons)
6,000
5,000
4,000
3,000
F
2,000
1,000
0
0
100 200 300 400 500 600
Computers
ACTIVE LEARNING
Answers
 Point G:
300 computers,
3500 tons wheat
 Point G requires
65,000 hours
of labor.
Not possible
because
economy
only has
50,000 hours.
1
Wheat
(tons)
6,000
5,000
4,000
G
3,000
2,000
1,000
0
0
100 200 300 400 500 600
Computers
The PPF: What We Know So Far
Points on the PPF (like A – E)
 possible
 efficient: all resources are fully utilized
Points under the PPF (like F)
 possible
 not efficient: some resources underutilized
(e.g., workers unemployed, factories idle)
Points above the PPF (like G)
 not possible
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
57
The PPF and Opportunity Cost
 Recall: The opportunity cost of an item
is what must be given up to obtain that item.
 Moving along a PPF involves shifting resources
(e.g., labor) from the production of one good to
the other.
 Society faces a tradeoff: Getting more of one
good requires sacrificing some of the other.
 The slope of the PPF tells you the opportunity
cost of one good in terms of the other.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
58
The PPF and Opportunity Cost
Wheat
(tons)
6,000
–1000
slope =
= –10
100
5,000
4,000
3,000
2,000
1,000
0
0
100 200 300 400 500 600
The slope of a line
equals the
“rise over the run,”
the amount the line
rises when you
move to the right by
one unit.
Here, the
opportunity cost of
a computer is
10 tons of wheat.
Computers
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
59
ACTIVE LEARNING
2
PPF and Opportunity Cost
In which country is the opportunity cost of cloth lower?
FRANCE
ENGLAND
Wine
Wine
600
600
500
500
400
400
300
300
200
200
100
100
0
0
0
100 200 300 400
Cloth
0
100 200 300 400
Cloth
ACTIVE LEARNING
Answers
2
England, because its PPF is not as steep as France’s.
FRANCE
ENGLAND
Wine
Wine
600
600
500
500
400
400
300
300
200
200
100
100
0
0
0
100 200 300 400
Cloth
0
100 200 300 400
Cloth
Economic Growth and the PPF
With additional
resources or an
improvement in
technology,
the economy can
produce more
computers,
more wheat,
or any combination
in between.
Wheat
(tons)
6,000
Economic
growth shifts
the PPF
outward.
5,000
4,000
3,000
2,000
1,000
0
0
100 200 300 400 500 600
Computers
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
62
The Shape of the PPF
 The PPF could be a straight line or bow-shaped
 Depends on what happens to opportunity cost
as economy shifts resources from one industry
to the other.
 If opp. cost remains constant,
PPF is a straight line.
(In the previous example, opp. cost of a
computer was always 10 tons of wheat.)
 If opp. cost of a good rises as the economy
produces more of the good, PPF is bow-shaped.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
63
As the economy
shifts resources
from beer to
mountain bikes:
Beer
Why the PPF Might Be Bow-Shaped
 PPF becomes
steeper
 opp. cost of
mountain bikes
increases
Mountain
Bikes
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64
At point A,
most workers are
producing beer,
even those who
are better suited
to building bikes.
Beer
Why the PPF Might Be Bow-Shaped
A
At A, opp. cost of
mtn bikes is low.
So, do not have to
give up much beer
to get more bikes.
Mountain
Bikes
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65
At B, most workers
are producing bikes.
The few left in beer
are the best brewers.
Beer
Why the PPF Might Be Bow-Shaped
Producing more
bikes would require
shifting some of the
best brewers away
from beer production,
causing a big drop in
beer output.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
At B, opp. cost
of mtn bikes
is high.
B
Mountain
Bikes
66
Why the PPF Might Be Bow-Shaped
 So, PPF is bow-shaped when different workers
have different skills, different opportunity costs of
producing one good in terms of the other.
 The PPF would also be bow-shaped when there
is some other resource, or mix of resources with
varying opportunity costs
(E.g., different types of land suited for
different uses).
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
67
The PPF: A Summary
 The PPF shows all combinations of two goods
that an economy can possibly produce,
given its resources and technology.
 The PPF illustrates the concepts of
tradeoff and opportunity cost,
efficiency and inefficiency,
unemployment, and economic growth.
 A bow-shaped PPF illustrates the concept of
increasing opportunity cost.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
68