Transcript wk2 production possibility

Economics: Markets and Market
Failure
Opportunity cost and
Production possibility
Source: Market in Algiers (1914) August Macke
http://commons.wikimedia.org/wiki/File:August_Macke_031.jpg
Starter
• Attempt these 10 questions on last
week’s lessons and the homework
• QUIZ
Objectives
By the end of the lesson students will be able to
• Define and calculate opportunity cost
• Understand production possibility curves
• Relate PPC to Opportunity Cost
• Understand efficient use of resources/
unemployed resources/ effects of technology
or resource finds in the context of PPCs
And
• Will be ready to explore economic systems
Scarcity and choice revisited
• Human beings have
• …………… wants
• …………… resources
• Therefore humans have to balance
………………………….. &
………………………………….
Opportunity cost
• Video
• Opportunity cost expresses the relationship
between scarcity and cost. The true cost of
an item is the cost of what a person has had
to give up to get it, not just the monetary cost.
• Mankiw’s second principle- the opportunity
cost of an item is what you give up to get
that item
• “Opportunity cost or economic opportunity
loss is the value of the next best alternative
forgone as the result of making a decision“
Source: Mankiw
http://commons.
wikimedia.org/w
iki/File:Gregory
Mankiw.jpg
Opportunity cost
• It is clearly different from accounting
cost which is direct and monetary
• It can encompass costs and benefits
• It can be applied to most human (and
animal)activity
Examples
•
The opportunity cost of my deciding not to work is the
wages I will have to give up and all this involves.
•
The opportunity cost of my holiday to Florence this
summer was that I was not able to buy a new deck for
my patio
•
The opportunity cost of the government increasing
public expenditure and spending an extra £10 billion on
interest payments is the extra resources that could
have been allocated to the National Health Service
Questions?
• What is the opportunity cost of
buying an Apple Macintosh IMac for
£900?
• What is the cost of your studying
economics at University for 3 years?
• What is the opportunity cost of using
arable farm land this year to
produce non organic oilseed rape?
Source: http://commons.wikimedia.org/wiki/File:Lochlevencastle.jpg
Source:
http://commons.
wikimedia.org/wi
ki/File:Imac_alu.
png
Examples of opportunity cost
• Patrick Minford, a right wing economist,
argued on the news on Monday evening
(14/09/09) that public sector expenditure
(particularly with regard to pay and
pensions) must be cut- what opportunity
costs might be associated with this policy?
• What is the opportunity cost of a school’s
buying textbooks for their students?
Source:
http://commons.wiki
media.org/wiki/File:
Patrick_minford1.jpg
Questions on exam?
• Multiple choice
• Define opportunity cost
• Choose opportunity cost from options
• Relate scarcity and choice
• Data response
• Apply the concept of opportunity cost to
cases that are presented.
Models in economics
• A model is a simplified version of a real world
• It allows understanding through simplification.
• The simplification usually comes in the form of
assumptions
• Eg we will look at an economy where we assume there are
only 2 goods for sale. This allows for a 2 dimensional
model which shows the fundamentals without confusing
them with masses of real world detail
• Economists use the ceteris paribus assumption in order to
concentrate on particular variables.
• Nb most models tend to have a quantitative
element but this is not essential.
Production Possibility Curves
• View introductory video by Bryn Jones
Source: http://www.youtube.com/watch?v=c24MBi26tgQ&feature=related
• Explain briefly in your own words what a
production possibility curve (also known
as a production possibility frontier or
transformation curve) is.
Production Possibility Curves
• Simplistic view 1
good b
0
110
10
100
20
90
30
80
40
70
50
60
60
50
70
40
80
30
90
20
100
10
110
0
Production possibility curve for goods a &
b
production of good b
good a
120
100
80
60
40
20
0
0
20
40
60
80
100
120
Production of good a
Task: create this chart in a spreadsheet application
Production Possibility Curves
• What do the 4 points
signify?
• A:
• B:
• C:
• D:
production of good b
Production possibility curve for goods a &
b
120
100
80
60
40
20
0
A
B
D
C
0
20
40
60
80
Production of good a
100
120
What a PPC shows
• The production possibility curve shows all the
efficient combinations of resource use.
• The production possibility curve shows the
trade off between 2 sets of outputs that an
individual, firm or economy faces
• It is possible but inefficient to operate inside
the curve.
• It is not possible, given the current state of
technology, scale of production etc to operate
outside the curve
PPC-more realistic
Production possibility curve for goods
a&b
good b
1000
100
900
200
800
300
700
400
600
500
500
600
400
700
300
800
200
900
100
1000
0
PPC Wheat v Tanks
160
1200
140
1000
120
800
600
Wheat
0
production of good b
good a
400
200
100
80
Wheat
60
40
0
0
500
1000
1500
20
Production of good a
0
0
50
100
150
Tanks
Linear
Tanks
Wheat
0
50
90
120
140
150
150
140
120
90
50
0
Concave
Task: Sketch these using a spreadsheet application
200
More realistic PPCs
Tanks
0
50
90
120
140
150
Wheat
150
140
120
90
50
0
In this more realistic scenario the
PPC is concave to the origin.
At first 10 less tanks=50k bushels of
wheat.
Then 20 less tanks=40k more
bushels of wheat
PPC Wheat v Tanks
160
140
Wheat
120
100
80
Wheat
60
40
Then 30 less tanks =30k more
bushels etc.
20
0
0
50
100
Tanks
150
200
Note the increasing opportunity
costs of switching resources.
The meaning of PPCs: revised
PPC Wheat v Tanks
•Where is the most efficient
position that 100 tanks can be
produced.
160
140
Wheat
120
100
80
Wheat
60
40
20
0
0
50
100
Tanks
150
200
•Where are there unemployed
resources?
•What happens if you try to
make 140 tanks and 140k
bushels of wheat?
•When would a straight line
PPC be realistic?
Opportunity cost and the PPC
To get an extra
amount of
consumer
goods, the
opportunity
cost is
in capital
goods.
PPC Capital v consumer goods
Consumer
2000
1500
1000
500
0
0
500
1000
Capital
1500
2000
The effects of new technology
y
y
x
Explain what has happened in both of these models.
x
Exam Questions
Exam questions
Research & Homework Activity
•
You will be given a category a,b,c,d,e
a)
Investigate how production and price decisions are made in a
command economy
Investigate how production and price decisions are made in a pure
capitalist economy
Investigate how production and price decisions are made in a mixed
economy
Investigate Nationalisation
Investigate Privatisation
b)
c)
d)
e)
You must then create a short presentation to be handed in
electronically at the start of next week’s lesson. Five will be chosen
at random to be presented to the class as a whole.
Sources
• Tutor2u revision notes:
http://tutor2u.net/economics/revisionnotes/