Bellringer 1. Which of the following is an example of a resource? I. petroleum II. A factory III. A cheeseburger dinner I only II only III only I and II only I, II, and III 2. Suppose that you prefer reading a book you already own to watching TV and that you prefer watching TV to listening to music. If these are your only 3 choices, what is the opportunity cost of reading? Watching TV and listening to music Watching TV Listening to music Sleeping The price of the book

Adam Smith, Absolute Advantage/Comparative Advantage, & Production Possibilities

What was the most important document written in 1776? Walk around the room asking students the answer to this question.

What was the Most Important Document Written in 1776? Responses Number of Results Declaration of Independence (1776) Constitution (1787) Wealth of Nations (1776) It Depends Emancipation Proclamation (1862) Magna Carta (1215) Some Economics Document? The American One? 138 27 1 2 4

What was the Most Important Document Written in 1776? Responses Number of Results Declaration of Independence (1776) 138 The Constitution (1787) 27 Articles of Confederation (1777) 1 Emancipation Proclamation (1862) Magna Carta (1215) 2 Some Economics Document? 4 The American one? Not sure 6 Wealth of Nations (1776) It Depends (correct) Total 182

ECON 200 students’ answers in regards to the question, what was the most important document written in 1776? Declaration of Independence 87 The Constitution 40 1787 The Bill of Rights 5 1789 The Magna Carta 3 1215 The Bible

The Great Gatsby 2 The Independence of Britain Keynes The document that says “I’m the Coolest.” The Wealth of Nations 14

The Father of Economics What was the most important document written in 1776? The Wealth of Nations written by Adam Smith Walk around the room asking students the answer to this question. The Father of Economics

And the genes continue today…. He is my great, great, great, great, great grandfather on my mother’s side

What made The Wealth of Nations “THE” most important document written in 1776? Adam Smith wrote about a pin factory. What did they call the workers in the pin factory? Just a bunch of pinheads.

When he first observed the factory, he noticed that each worker was producing his or her own pins. By the end of the day, the total production by each worker was 20 pins. He stated that each worker should specialize in the production stage rather than produce his or her own pins. Through specialization, the total output by the factory increased to 48,000 pins per day. (Page 11, Wealth of Nations)

One person draws the wire. One person straightens the wire. One person cuts the wire. One person points the wire. One person grinds the wire at the top to receive the head of the pin. One person makes the head of the pin. One person attaches the head to the pin.

Any illegal activity that you can think of I am going to prove that specialization works. I am going to name a state and you tell me what that state specializes in: Idaho Potatoes Florida Oranges Oil or cattle Texas Michigan Automobiles Nevada Any illegal activity that you can think of

Absolute and Comparative Advantage Betty types 120 w.p.m. with 0 errors Jim types 60 w.p.m. with 0 errors Who should do the typing, Betty or Jim? Betty. Why? Betty can type ABSOLUTELY faster than Jim can. What type of advantage does Betty have over Jim? Absolute Advantage

Absolute Advantage-- One entity can produce something either faster than or greater than another entity.

I forgot to tell you--Betty is a lawyer. A lawyer earns $60 an hour. A secretary earns $6 an hour. A 600-word document has to be typed, how long does it take each person to type this document? How long does it take Betty to type this document? How long does it take Jim to type this document?

Who should do the typing? Jim Comparative Advantage One entity can produce something at a LOWER MARGINAL OPPORTUNITY PRODUCTION COST than another entity

Comparative Advantage Take absolute advantage and KICK IT OUT THE DOOR. The more important of the two is-- Comparative Advantage

Person-hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 Which country has the absolute advantage in the production of Maple Syrup? In Copper Wire?

Person-hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 Kick it out the door! What did I tell you to do with Absolute Advantage?

Person-hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 More importantly, which country has the Comparative Advantage in Maple Syrup? In Copper Wire? And Why?

Person-hours required U.S. Canada U.S. 2 1 Maple Syrup 5 8 Copper Wire 6 7 2 x = 10 Canada 2 x 1 2 + + = 14 11 15 U.S. saves one-man hour Canada saves one-man hours

Person-hours required U.S. Canada U.S. 2 1 Maple Syrup 5 8 Copper Wire 6 7 2 x = 10 Canada 1 2 + 2 x + = 14 11 15 Should the U.S. keep the 2 barrels of maple syrup and Canada 2 miles of copper wire?

U.S. Canada U.S. 2 1 Maple Syrup 5 8 Copper Wire 6 7 2 x = 10 Canada 1 Person-hours required U.S. Canada U.S. 2 1 Maple Syrup 5 8 Copper Wire 6 7 2 x = 10 Canada 1 2 + 2 x + = 14 11 15 No! The U.S. should trade one barrel of maple syrup for one mile of copper wire.

Figuring Comparative Advantage Output Problems Input Problems Opportunity Cost=Total Cost/Total Production Opportunity Cost=Total Input/Total Forgone

Amount Produced per hr. U.S. Canada Maple Syrup (gal.) 40 20 Copper Wire (mile) 20 5 Which country has the absolute advantage in the production of Maple Syrup? In Copper Wire? What about Comp. Adv.

After Some Math Magic… U.S. should produce Wire, Canada should produce Syrup You could also look at it like this (b/c we are looking for who has a lower MARGINAL opportunity cost): US: 1 syrup= _____ wire; 1 wire=_____syrup Canada: 1/2 2 1/4 4

Person-hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 9 Which country has the absolute advantage in the production of Maple Syrup? In Copper Wire?

After Some Math Magic… U.S. should produce Syrup, Canada should produce Wire If the numbers represent the same thing, it will be no different, no matter which method you are looking at

More on figuring Comparative Advantage to come…

Production Possibilities Curve or Frontier

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. 14

The Production Possibilities Frontier Quantity of Computers Produced 3,000 C A 2,200 600 B 700 2,000 Production possibilities frontier 1,000 300 D Quantity of 1,000 Cars Produced

The Production Possibilities Frontier Concepts illustrated by the production possibilities frontier Efficiency Trade-offs Opportunity cost Economic growth 21

A Shift in the Production Possibilities Frontier Quantity of Computers Produced 4,000 3,000 1,000 2,300 650 G 2,200 600 A Quantity of Cars Produced

You must make yourself worse off in the short run to make yourself better off in the long run.

Study Leisure

Capital Goods Consumption Goods

Theme Song: http://www.youtube.com/watch?v=H8Uf8Zj9W24&feature=related

3 Hour Tour

The ship set ground on the shore of this uncharted desert isle 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 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?” FOOD!!!

But you realize, doing this is going to get real old, real fast! So what should I do?

All the while, making myself worse off 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 http://www.riveroflifefarm.com/images/lodging/th/th2/tree-house-summer.jpg

Capital Goods Consumption Goods By producing more capital goods relative to consumption goods, the economy’s Production-possibilites curve to shifts OUTWARD and shifts outward FASTER. Consumption Goods

P P Curve

Capital This is GOOD! Consumption If the PP shifts outward

Capital This is BAD!! Consumption If the PP shifts inward

Capital Goods Consumption Goods There are five variables that shift the PP outward--

Five Variables that Shift the PP Outward: Increase the productive labor force (productivity). Increase the quantity and quality of natural resources. 3. Increase the quantity and quality of capital. 4. Increase health and education. 5. Increase technology.

Japan 1940

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

morning of August 6, 1945 Nagasaki Hiroshima 11:02 am, August 9, 1945 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

What do you think happened to Japan’s productive labor force? Capital Japan 1945 rice Consumption

What do you think happened to the quantity and quality of its natural resources? Capital Japan 1945 rice Consumption

What do you think happened to the quantity and quality of its capital stock? Capital Japan 1945 rice Consumption

What do you think happened to its health and education? Capital Japan 1945 rice Consumption http://hiroshima.tomato.nu/image/park_ma/e11-10.jpg

What do you think happened to its technology? Capital Japan 1945 rice Consumption

What happened to Japan’s Capital Japan 1945 rice Consumption

Capital Goods Consumption Goods

http://www. ellsworthamerican http://www.ellsworthamerican.com/archive/news2000/08-24-00/news3_08-24-00b.gif

Capital Goods Consumption Goods

The Classic PPC Example

Guns Military Butter Consumption goods

Employment of labor hours PPF Example Producing one computer requires 100 hours labor. Producing one ton of wheat requires 10 hours labor. E D C B A Wheat Computers Production Employment of labor hours 50,000 500 50,000 40,000 10,000 25,000 1,000 400 Suggestion: Show first row. Explain how we get the production numbers from the employment numbers. Then, show the rest of the employment numbers, and give students 3 minutes to compute the production numbers for each employment allocation. 2,500 250 4,000 100 5,000 76

PPF Example E D C B A Point on graph Production Com-puters Wheat A 500 B 400 1,000 C 250 2,500 D 100 4,000 E 5,000 E D C B A 77 77

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? This exercise leads students to discover for themselves that points under the PPF are possible but inefficient, while points above it are not possible.

ACTIVE LEARNING 1 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. F

ACTIVE LEARNING 1 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. G

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) not efficient: some resources underutilized (e.g., workers unemployed, factories idle) Points above the PPF (like G) not possible 81

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. 82

The PPF and Opportunity Cost 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. –1000 slope = = –10 100 Here, the opportunity cost of a computer is 10 tons of wheat. Here, the “rise” is a negative number, because as you move to the right, the line falls (meaning wheat output is reduced). Moving to the right involves shifting resources from the production of wheat (which causes wheat output to fall) to the production of computers (which causes computer production to rise). Producing an additional computer requires the resources that would otherwise produce 10 tons of wheat. 83

ACTIVE LEARNING 2 PPF and Opportunity Cost In which country is the opportunity cost of cloth lower? FRANCE ENGLAND This exercise reinforces the material on the preceding slide. It is especially useful if you plan to cover Chapter 3 (Interdependence and the Gains from Trade) after completing Chapter 2.

ACTIVE LEARNING 2 Answers England, because its PPF is not as steep as France’s. FRANCE ENGLAND There are two ways to get the answer. The hard way is to compute the slope of both PPFs. The slope of France’s PPF equals -600/300 = -2, meaning that France must give up two units of wine to get an additional unit of cloth. The slope of England’s PPF = -200/300 = -2/3, meaning that England only must sacrifice 2/3 of a unit of wine to get an additional unit of cloth. Thus, the opportunity cost of cloth is lower in England than France. The question, however, does not ask for the numerical values of the opportunity cost of cloth in the two countries. It only asks which country has a lower opportunity cost of cloth. There is an easy way to determine the answer. Students must remember that the slope of the PPF equals the opportunity cost of the good measured on the horizontal axis. Then, students can simply “eyeball” the two PPFs to determine which is steepest. From what the graphs show, it’s pretty easy to see that England’s PPF isn’t as steep, and therefore the opportunity cost of cloth is lower in England than in France.

Economic Growth and the PPF With additional resources or an improvement in technology, the economy can produce more computers, Economic growth shifts the PPF outward. more wheat, The PPF shows the tradeoff between the outputs of different goods at a given time, but the tradeoff can change over time. For example, over time, the economy might get more workers (or more factories or more land). Or, a more efficient technology might be invented. Both events—an increase in the economy’s resources or an improvement in technology—cause an expansion in the set of opportunities. That is, both allow the economy to produce more of one or both goods. This is a simple example of economic growth, an important subject that gets its own chapter in the macroeconomics portion of the textbook. In the example shown on this slide, economic growth causes a parallel outward shift of the PPF. Since the new PPF is parallel to the old one, the tradeoff between the two goods is the same. However, this need not always be the case. For example, if a new technology had more impact on the computer industry than on the wheat industry, then the horizontal (computer) intercept would increase more than the vertical (wheat) intercept, and the PPF would become flatter: the opportunity cost of computers would fall, because the technology has made them relatively cheaper (relative to wheat). Going into more detail here is probably beyond the scope of this chapter. or any combination in between. 86

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. 87

Why the PPF Might Be Bow-Shaped As the economy shifts resources from beer to mountain bikes: PPF becomes steeper opp. cost of mountain bikes increases Mountain Bikes Beer 88

Why the PPF Might Be Bow-Shaped At A, opp. cost of mtn bikes is low. At point A, most workers are producing beer, even those who are better suited to building bikes. So, do not have to give up much beer to get more bikes. A Beer Here, we are using “workers” for the more general “resources,” to keep things simple and consistent with the previous examples. Mountain Bikes 89

Why the PPF Might Be Bow-Shaped At B, most workers are producing bikes. The few left in beer are the best brewers. Producing more bikes would require shifting some of the best brewers away from beer production, causing a big drop in beer output. At B, opp. cost of mtn bikes is high. Beer B Mountain Bikes 90

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). The bow-shaped PPF is more realistic. However, the linear PPF is simpler to work with, and we can learn a lot about how the economy works using the linear PPF. In Chapter 3, we will use a linear PPF to show how trade can make two countries (or two individuals) better off. Note: In the “Problems and Applications” at the end of the chapter, problem 4 asks students to construct a PPF for an economy with three different workers (Larry, Moe, and Curly), each with a different opportunity cost. The PPF ends up having three line segments (one for each worker), which--very roughly--approximates a bow-shape. After students work through and understand this problem, it should not be hard for them to understand the following: the more different kinds of workers (or, more generally, resources) there are, the closer the PPF will resemble a smooth bow shape. In an actual economy like the U.S., there are millions of different workers with different opportunity costs, so a smooth bow-shaped PPF is a nearly perfect approximation to the actual PPF. 91

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. 92