Transcript Opportunity cost. - University High School

What is Economics?
Mr. Bordelon
Economics
What is Economics?
• Economics is the study of how people
make choices to satisfy their wants and
needs.
– Basic definition...key thing in economics.
Whenever you work with the language in the
class, explain it basically. If you can explain
the idea to your Mom or a four-year old child,
you’ve got it.
Why do we have to make a choice?
• Scarcity. Scarcity
happens when there is
a limited amount of
resources to meet
unlimited wants and
needs.
– What’s a need?
– What’s a want?
• Shortage. Shortage is
not scarcity.
Shortages happen
when producers can’t
offer goods or services
at current prices.
– What’s a good?
– What’s a service?
Why do we have to make a choice?
• Look, there’s just not enough things on this
planet to get everything you want. No, not
even for you, Monserrat.
• Not only that, but just because you want
something doesn’t mean you can have it.
For example, you can not have my
awesome car. NOT YOURS.
Factors of Production
• Land. All natural resources that are used to
produce goods and services.
• Labor. Any effort a person devotes to a
task for which that person is paid.
• Capital. Any man-made resource that is
used to create other goods and services.
• Entrepreneur. People who decide how to
combine land, labor and capital to create
new goods and services.
Factors of Production
• Land. All natural resources that are used to
produce goods and services.
– Awesome. What’s a natural resource?
Factors of Production
• Labor. Any effort a person devotes to a
task for which that person is paid.
– Awesome. Translate this into a language we
can understand.
– Great, what about volunteer work?
Factors of Production
• Capital. Any man-made resource that is
used to create other goods and services.
– Awesome. What’s a man-made resource?
Factors of Production
• Capital. Any man-made resource that is
used to create other goods and services.
– Well, let’s back up. Two categories to help you
out that you should know.
– Physical capital. Man-made objects used to
create other goods and services.
• What are we talking about here?
– Human capital. Knowledge and skills a
worker gains through education and experience.
• What are we talking about here?
Factors of Production
• Entrepreneur. People who decide how to
combine land, labor and capital to create
new goods and services.
– Awesome. So what’s an entrepreneur?
Putting It Together
• In your groups, you, the entrepreneur, will
take one of these companies and write out
what you need in terms of the factors of
production.
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Shoemaker
Car company
Graphic design firm
Doctor’s office
Orange producer
Questions
• What is the difference between a shortage and scarcity?
– (a) A shortage can be temporary or long-term, but scarcity always exists.
– (b) A shortage results from rising prices; a scarcity results from falling
prices.
– (c) A shortage is a lack of all gods and services; a scarcity concerns a
single item.
– (d) There is no real difference between a shortage and a scarcity.
• Which of the following is an example of using physical capital to save
time and money?
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–
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(a) hiring more workers to do a job
(b) building extra space in a factory to simplify production
(c) switching from oil to coal to make production cheaper
(d) lowering workers’ wages to increase profits
Questions
• What is the difference between a shortage and scarcity?
– (a) A shortage can be temporary or long-term, but scarcity always
exists.
– (b) A shortage results from rising prices; a scarcity results from falling
prices.
– (c) A shortage is a lack of all gods and services; a scarcity concerns a
single item.
– (d) There is no real difference between a shortage and a scarcity.
• Which of the following is an example of using physical capital to save
time and money?
–
–
–
–
(a) hiring more workers to do a job
(b) building extra space in a factory to simplify production
(c) switching from oil to coal to make production cheaper
(d) lowering workers’ wages to increase profits
It’s all about choice, baby.
• Okay, so we have to make choice. Why do
we have to make a choice?
– Scarcity! Remember, we only have a limited
amount of resources to meet an unlimited
amount of wants and needs.
– But can we actually measure what the
alternatives are? Can we actually put a value
on it?
• Gee, what do you think?
Trade-Offs
• Trade-off. All the alternatives that a
person gives up when he chooses one
alternative over another.
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Sleeping or studying?
Playing Call of Duty or studying?
Texting or studying?
Winking or smiling?
Opportunity Cost
• HEY YOU! THIS IS IMPORTANT!!!
• Opportunity cost. The most desirable
alternative given up as a result of a decision.
– Awesome. Now let’s translate this into a
language we can all understand.
Opportunity Cost
• Understand that if we’re talking about opportunity
costs, and trust me, we will talk a lot about
opportunity cost, we must first MAKE A
CHOICE.
• Once that choice is made, we can then identify the
opportunity cost.
• Think of it as an opportunity missed.
• Ultimately the decision you make depends on
what you are willing to sacrifice. That sacrifice is
the opportunity cost.
Opportunity Cost
• Should I go out with that hot chick at Breakers, or should I
stay loyal to my girlfriend?
• Should I have a salad or a steak?
• Should I buy an iPhone, or put the $200 into a savings
account or Certificate of Deposit?
• Should Best Buy open more box stores, or focus its assets
on a stronger online presence?
• Should I fail a class and stay another year at University
High School, or should I graduate, go on with my life and
make an obscene amount of cash?
Guns or Butter
• Countries also have to make decisions as to
how to spend their money, allocate
resources, etc.
• “Guns or Butter” is an economic model that
economists use to see how a particular
economy works.
– Guns: military/industrial goods
– Butter: food/consumer goods
– Why these two things?
Guns or Butter
• Guns or Butter also focuses on the health of
nations. Economists and political scientists
use the model of guns or butter to judge
how a society is doing, and even what a
society looks like.
• And you can do the same.
Guns or Butter: Brazil
Guns or Butter: Japan
Guns or Butter: United States
Guns or Butter: The Bahamas
Guns or Butter: Mali
Guns or Butter:
Guns or Butter: Libya
Guns or Butter: North Korea
Guns or Butter
• So what conclusions can we make about the
results of guns or butter:
– Political stability?
– Society: happy/sad?
– Democratic/Authoritarian?
Questions
• Opportunity cost is
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(a) any alternative we sacrifice when we make a decision.
(b) all of the alternatives we sacrifice when we make a decision.
(c) the most desirable alternative given up as a result of a decision.
(d) the least desirable alternative given up as a result of a decision.
• Economists use the phrase “guns or butter” to describe the fact that
– (a) a person can spend extra money either on sports equipment or food.
– (b) a person must decide whether to manufacture guns or butter.
– (c) a nation must decide whether to produce more or less military or
consumer goods.
– (d) a government can buy unlimited military and civilian goods if it is rich
enough.
Questions
• Opportunity cost is
–
–
–
–
(a) any alternative we sacrifice when we make a decision.
(b) all of the alternatives we sacrifice when we make a decision.
(c) the most desirable alternative given up as a result of a decision.
(d) the least desirable alternative given up as a result of a decision.
• Economists use the phrase “guns or butter” to describe the fact that
– (a) a person can spend extra money either on sports equipment or food.
– (b) a person must decide whether to manufacture guns or butter.
– (c) a nation must decide whether to produce more or less military or
consumer goods.
– (d) a government can buy unlimited military and civilian goods if it is rich
enough.
Learning Target
• Economic Decision Making and Economic
Systems
– Analyze production possibilities curves to
explain scarcity, choice and opportunity
costs.
Production Possibilities Curve
• The Production Possibilities Curve (PPC) is
the first graph you will need to learn how to
make and interpret in Economics.
• A PPC shows alternative ways that an
economy can use its resources.
PPC: The Set-Up
• The PPC is a hypothetical model. Models
help economists find information about an
economy, see if something is right or
wrong, and even make predictions about
where the economy is going.
• In the PPC, we’re making a model of a
basic economy with only TWO products,
very different ones.
Draw the Basic Graph and Label
What does this all mean?
• Production Possibilities Frontier (PPF).
Any point along the PPF is considered
efficient. You are using every single
resource in the economy for either one good
or the other, or both.
• Efficiency means using resources in such a
way as to maximize the production of goods
and services. Good.
What does this all mean?
• If there’s efficiency, then there’s gotta be
inefficiency too.
• Underutilization. Any point inside the
PPF is considered inefficient. Why?
What does this all mean?
• If there’s efficiency, then there’s gotta be
inefficiency too.
• Underutilization. Any point inside the
PPF is considered inefficient. Why?
• Inefficiency means that this economy is not
using all of its resources to produce goods
and services. Stuff is just sitting there.
Watching you. Wondering why you’re not
using it. It’s probably crying too. Bad.
What does that all mean?
• The point on the outside is considered
impossible. Why?
What does that all mean?
• The point on the outside is considered
impossible. Why?
• Because the economy we’re looking at
doesn’t have enough resources to reach that
point.
• But could it ever?
What does that all mean?
• Yes, if the economy were to grow...
• If we were to find a new resource to use or
new technology, then the entire PPC would
shift to the right.
• This is an indication that the economy is
growing.
What does that all mean?
• Okay, fine. But what if the economy were
to experience a nuclear war or the Grays
were to come down and wipe out
technology?
• In that case, the economy would shrink, and
we would see the PPC shift to the left.
• Economic growth and contraction (or
shrinking) is a common feature. For now,
just focus on the graph.
Let’s Draw a Real One Out
Watermelons
Shoes
(millions of tons) (millions of pairs)
0
15
8
14
14
12
18
9
20
5
21
0
What does it all mean?
• Now that you’ve got your graph all nice and
pretty, let’s start asking what this actually
means.
– Identify the PPF. What does the PPF mean in
your new graph?
– Identify a point of underutilization? What does
that point mean?
– Identify a point that’s impossible to achieve
Why can’t we reach it? Could we ever? How?
Awesome. What’s the
Opportunity Cost?
• Remember, economists want to make
models that give them accurate and detailed
information and even be able to predict
events.
• This graph allows us to actually measure the
opportunity cost, to give a specific value.
Opportunity Cost and the PPC
• Label each one of the points you drew on
your graph A through F.
• Start at point B and let’s move to point C.
In this scenario, our economy has decided
to make more watermelons. This means we
have to give up making some shoes. The
number of shoes we give up is the
opportunity cost.
• So how many shoes are we giving up?
Opportunity Cost and the PPC
• If you said 2 million pairs of shoes, you win.
• Start at point D and let’s move to point C. In
this scenario, our economy has decided to
make more shoes. This means we have to give
up making some watermelons. The number of
watermelons we give up is the opportunity
cost.
• So how many watermelons are we giving up?
Opportunity Cost and the PPC
• If you said 4 million tons of watermelons, you
win.
• You can actually start at any of the points you
labeled in any direction. Whatever you choose
to make more of, the opportunity cost is what
you could have made if you had dedicated the
resources to it.
But there’s a slight problem...
• Why is the line curved? Why isn’t it
straight? Is that a little weird-looking to
you?
Ah, but there’s a solution!
• The Law of Increasing Opportunity
Costs. When an economy switches from
one item of production to another, more and
more resources are necessary to increase
production of the second item.
– Awesome. Let’s translate, shall we?
Law of
Increasing Opportunity Costs
• Look at the graph again. Why isn’t the
change from shoes to watermelons a onefor-one exchange?
Law of
Increasing Opportunity Costs
• Look at the graph again. Why isn’t the
change from shoes to watermelons a onefor-one exchange?
– These items are different. You use different
factors of production to make shoes and
watermelons.
– When you switch, you’d have to adapt those
resources.
Law of
Increasing Opportunity Costs
• Simply put, when you switch from one item
of production to another, it costs more and
more to do so.
• This is why the line is bent, not straight.
It’s not a one-for-one exchange.
Questions
1. A production possibilities frontier shows
(a) farm goods and factory goods produced by an economy.
(b) the maximum possible output of an economy.
(c) the minimum possible output of an economy.
(d) underutilization of resources.
2. An economy that is using its resources to produce the maximum
number of goods and services is described as
(a) efficient.
(b) underutilized.
(c) growing.
(d) trading off.
Questions
1. A production possibilities frontier shows
(a) farm goods and factory goods produced by an economy.
(b) the maximum possible output of an economy.
(c) the minimum possible output of an economy.
(d) underutilization of resources.
2. An economy that is using its resources to produce the maximum
number of goods and services is described as
(a) efficient.
(b) underutilized.
(c) growing.
(d) trading off.