REVIEW Explain relationship between scarcity and choices Differentiate between positive & normative Differentiate between microeconomics and macroeconomics Explain tradeoffs and opportunity costs Name 10 different teachers at RMHS

Homework Answers: Chapter 2 P&A #7 Two of the statements are clearly normative. "5. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly" "9. The government should restructure the welfare system along the lines of a 'negative income tax.'" Both are suggestions of changes that should be made, rather than statements of fact, so they are clearly normative statements.

The 4 Factors of Production We live in a world of limited resources and unlimited wants

The Four Factors of Production ALL resources can be classified as one of the following four factors of production: 1. Land -All natural resources that are used to produce goods and services. (Ex: water, sun, plants, animals) 2. Labor -Any effort a person devotes to a task for which that person is paid. (Ex: manual laborers, lawyers, doctors, teachers, waiters, etc.) 3. Capital - Physical Capital- Any human-made resource that is used to create other goods and services ( Ex: tools, tractors, machinery, buildings, factories, etc.) Human Capital- Any skills or knowledge gained by a worker through education and experience

The Four Factors of Production Cont. 4. Entrepreneurship -ambitious leaders that combine the other factors of production to create goods and services. Examples-Henry Ford, Bill Gates, Inventors, Store Owners, etc. Entrepreneurs: Take The Initiative Innovate Act as the Risk Bearers So they can obtain _________. PROFIT Profit = Revenue - Costs

Unit 1: Basic Economic Concepts 1.3 Production Possibilities Frontier

Society has unlimited wants but limited resources WE HAVE A PROBLEM!! Scarcity Society has unlimited wants but limited resources

Scarcity Means Governments Must Chooses Between Guns and Butter Governments have to decide how many resources to devote toward the military and how many resources to devote toward consumer goods Classic case of guns versus butter 8

"Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.” “The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement.” “We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.” -Dwight Eisenhower Speaking against the military build up of the cold war 9

The USS Dwight Eisenhower Launched in 1975 and cost $679 million ($4.5 billion in 2007 dollars) 10

The Production Possibilities Curve (PPC) Is an Economic Model

What is the Production Possibilities Curve? A production possibilities curve (or frontier) is a model that shows alternative ways that an economy can use its scarce resources This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.

Key Assumptions of the PPC: Only two goods can be produced Full employment of resources Fixed Resources and technology (Ceteris Paribus)

Production “Possibilities” Table f 14 12 9 5 2 4 6 8 10 Bikes Computers Each point represents a specific combination of goods that can be produced given full employment of resources. NOW GRAPH IT: Put bikes on y-axis and computers on x-axis

Production Possibilities Curve How does the PPC demonstrates scarcity and efficiency? 14 12 10 8 6 4 2 Impossible/Unattainable (given current resources) A B G C Bikes Efficient D Inefficient/ Unemployment E 0 2 4 6 8 10 Computers

Opportunity Cost How does the PPC graphically demonstrates trade-offs and opportunity costs? Example: 1. The opportunity cost of moving from a to b is… 2 Bikes 2.The opportunity cost of moving from b to d is… 7 Bikes 3.The opportunity cost of moving from d to b is… 4 Computer 4.The opportunity cost of moving from f to c is… 0 Computers 5.What can you say about point G? Unattainable

The Production Possibilities Curve (or Frontier) Consumer Goods- created for direct consumption (example: pizza) Capital Goods- created for indirect consumption (oven, blenders, knives, etc.) Goods used to make consumer goods

Production Possibilities A B C D E Economics Class 7 6 5 4 3 Computer Class 1 2 3 4 5 List the Opportunity Cost of moving from a-b b-c c-d d-e

Production Possibilities Constant Opportunity Cost- Resources are easily adaptable for producing either good. Result is a straight line PPC (not common)

Production Possibilities A B C D E PIZZA 20 19 16 10 0 ROBOTS 0 1 2 3 4 List the Opportunity Cost of moving from a-b b-c c-d d-e

Production Possibilities Law of Increasing Opportunity Cost- As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Why? Resources are NOT easily adaptable to producing both goods. Result is a bowed out (Concave) PPC

Constant vs. Increasing Opportunity Cost Identify which product would have a straight line PPC and which would be bowed out? Corn Cactus Wheat Pineapples

The Production Possibilities Curve and Efficiency

Two Types of Efficiency Productive Efficiency- Products are being produced in the least costly way. This is any point ON the Production Possibilities Curve Allocative Efficiency- The products being produced are the ones most desired by society. This optimal point on the PPC depends on the desires of society. 24

Productive and Allocative Efficiency Which points are productively efficient? Which are allocatively efficient? 14 12 10 8 6 4 2 Productively Efficient combinations are A through D A B G Allocative Efficient combinations depend on the wants of society (What if this represents a country with no electricity?) Bikes C E F D 0 2 4 6 8 10 Computers 25

Why two types of efficiency? Is combination “A” efficient? Yes and No. It is productively efficient but it is not the combination society wants Size 20 running shoes A Size 10 running shoes

2008 Audit Exam 17.B

2008 Audit Exam A

Shifting the Production Possibilities Curve

Production Possibilities Key Assumptions Revisited Only two goods can be produced Full employment of resources Fixed Resources (4 Factors) Fixed Technology What if there is a change?

Production Possibilities What happens if there is an increase in population? Computers Pizzas

Production Possibilities What happens if there is an increase in population? Computers Pizzas 32

Production Possibilities What if there is a technology improvement in pizza ovens Computers Pizzas 33

Production Possibilities What if there is a technology improvement in pizza ovens Computers Pizzas 34

Capital Goods and Future Growth Countries that produce more capital goods will have more growth in the future. Panama – Favors Consumer Goods Mexico – Favors Capital Goods Current PPC Future PPC Future PPC Capital Goods Current PPC Capital Goods Consumer goods Consumer goods Panama Mexico

3 Shifters of the PPC Production Possibilities 4 Key Assumptions Revisited Only two goods can be produced Full employment of resources Fixed Resources (4 Factors) Fixed Technology What if there is a change? 3 Shifters of the PPC 1. Change in resource quantity or quality 2. Change in Technology 3. Change in Trade

PPC Practice Draw a PPC showing changes for each of the following: 3 PPC for Computers (y axis) and Pizza 1. New computer making technology 2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows 4 PPC for Capital Goods (y axis) and Consumer Goods 4. Destruction of power plants leads to severe electricity shortage 5. Faster computer hardware 6. Many workers unemployed 7. Significant increases in education

New computer making technology A shift only for computers Question #1 New computer making technology A shift only for computers Computers Pizzas 38

Question #2 Decrease in the demand for pizza The curve doesn’t shift! A change in demand doesn’t shift the curve Computers Pizzas 39

Mad cow disease kills 85% of cows A shift inward only for Pizza Question #3 Mad cow disease kills 85% of cows A shift inward only for Pizza Computers Pizzas 40

Question #4 Destruction of power plants Decrease in resources decrease production possibilities for both Capital Goods (Guns) Consumer Goods (Butter) 41

Question #5 Faster computer hardware Quality of a resource improves shifting the curve outward Capital Goods (Guns) Consumer Goods (Butter) 42

Question #6 Many workers unemployed The curve doesn’t shift! Unemployment is just a point inside the curve Capital Goods (Guns) Consumer Goods (Butter) 43

Question #7 Significant increases in education The quality of labor is improved. Curve shifts outward. Capital Goods (Guns) Consumer Goods (Butter) 44