Production Possibilities and Opportunity Costs- Lesson 3

Objectives Build a Production Possibilities Table Using Grid, Draw an accurate Opportunity Costs Graph Use Game theory to make an economic decision C1 PO2, C1 PO1c

Cooperation and Competition Economic activity is based on cooperation and competition between producers and consumers. Because resources are limited, the first choice a producer/consumer must make is what to produce/consume (allocate), and in what quantity (marginal analysis)

Consumer Sovereignty In the United States, the consumer makes their needs known to businesses by BUYING THEIR GOODS/SERVICES How do consumers make their desires know to government?_______________ Consumer Sovereignty in the United States means that ordinary people (consumers) work with producers and government to decide what is produced

Analysis Describe how consumer sovereignty works in these sectors to design a cell phone: – Consumers – Producers – Government

The Economic Goal In the United States, the most important economic goal is to use scarce resources – efficiently and effectively – to provide the most people the “best opportunity” for economic self-sufficiency Other countries (North Korea) may have other priorities Economic analysis of Production Possibilities Tables is an important first step on making a logical decision on efficiency/effectiveness

“Build” a 7 day Production Table Resource= 16 Labor Hours per day Increments of 1 hour Production= For Profit Labor Increments of 1 hour What factors will effect the distribution of your 16 labor hours? What factors will effect the distribution of your For Profit Labor? On which days are the Production Possibilities greatest for “For Profit Labor”? What factors might make changes in your Table? What other needs might not get filled while obtaining money? A Production Possibilities Table (Box with numbers) gives specific tradeoffs for choices made, illustrating the opportunity costs numerically

Opportunity Cost Opportunity Cost describes the cost of decisions made using Production Possibilities Opportunity= Your Choice Opportunity Cost= Next Best Choice Example – If you choose to work for profit 6 hours per night after school, you no longer have those 6 hours to study. – The classic example of opportunity costs is called “Guns or Butter”

Op Cost Guns and Butter Setting : USA in World War II During the war, the Office of Production Assurance had to balance two production needs: Guns for the military and Butter (consumer goods) for the people. Assume: For each $1 spent on guns, butter must go down by $2. Construct a PP Table up to $20

Prod. Poss. Curve Graphing Draw a XY axis grid, and label Plot points of intersection between Guns and Butter Connect the dots. This “Frontier”marks the maximum of the production possibilities If Production choices move two intersects towards more towards Guns, what is the numerical Butter cost? What probably happened when the war ended? What would be the cost? Production Possibilities CURVES (graph with or without numbers) helps a producer understand all the potential uses of their resources (Opportunity costs)

Table Build

Curve Build

Plasma TV You are considering purchasing a 52” Plasma HD TV, or purchasing a 7 day Hawaii vacation with your best friend. The price to purchase either is $5000. Build an XY axis, plot intercepts, Connect the dots. If you purchase the $5000 HDTV, what is the opportunity cost?

Three Economic “Games” Zero Sum= Winner takes all. Only one winner. Net Gain= Each party receives something perceived to be at least fractionally better than what was exchanged. Tragedy of the Commons each party takes advantage of a common resource and can either self regulate to preserve the resource or over-consume and exhaust the resource

Outside the Grid Production Possibilities and Opportunity Costs are “bi-variate” (two variables) Most economics questions require multivariate analysis- examination of the many variables that effect choices The study of multivariate analysis is called “Game Theory” and was explored by John Nash

The Nash Equilibrium The competition of production possibilities (bi-variate) must be balanced to ensure the maximum benefit in a multivariate reality This is illustrated in “A Beautiful Mind” by the scene “Blonde in the Bar” Play the scenario!

Lunch Quad analysis Assuming “territory” in the TGB quad to be the valued FOP, describe how you believe 3 different groups on campus “game” the quad. – Zero-sum, Net Gain or Tragedy? – Which groups have/lose advantage based on your analysis? – What variables (changes) might force them to a different game strategy? – What would Nash suggest is another option?