Opportunity Cost and Production Possibilities E.2, E.8

Objectives Students will… Describe why every decision involves trade-offs Explain the concept of opportunity cost Interpret a production possibilities curve Demonstrate how production possibilities curves show efficiency, growth and cost.

Warm-Up In your group, come up with 5 vacation destinations. Wait for further instructions…

Why? Why did you choose that specific one? What was discussed?

Trade-offs Everyone makes trade-offs Individual Businesses Society All the alternatives that are given up whenever we choose one course of action over another. Individual Clean your room or play a game Wear short sleeves, wear long sleeves Sport or Academic club Businesses How to use land, labor, capital Society Guns or butter – a country that decides to produce more military goods has fewer resources to devote to consumer goods and vice versa.

How do you think trade-offs get translated into economic and government policies?

Opportunity Cost The most desirable alternative given up as the result of a decision is called the opportunity cost. Examples: Family buys a computer or goes on trip Gov’t producing more “guns” has less “butter” Sleep late or wake up early to eat breakfast? Sleep late or wake up early to study for a test? Decision depends on the specific opportunity cost – what you are willing to sacrifice. n

Thinking at the Margin Thinking at the margin is an additional characteristic of opportunity cost. Many decisions involve adding one unit or subtracting one unit (like a minute or a dollar) When you decide how much more or less to do, you are thinking at the margin. Extra study time example

Production Possibilities Intro https://www.youtube.com/watch?v=tW4G5IPpzFY

Production Possibilities Curve Economists often use graphs to analyze the choices and trade-offs that people make. Production Possibilities Curve – shows alternative ways to use an economy’s productive resources. Castaway example

Chuck’s Resources Land Labor Capital sand, water, fish, coconut trees himself (energy) Capital ice skate, deflated lifeboat, video tape, Wilson (of course) p. 16 in AP Econ book

PPF Crucial distinction between points inside, outside, or on the PPC PPC represents feasibility and efficiency  show maximum possible output and production. Feasibility – possible, it can happen; something can be produced with the resources given Efficient – using resources in such a way as to maximize the production of goods and services

Distinction of Points Inside: Feasible but not efficient On the curve: feasible and efficient (best possible outcome) Outside: Not feasible.

Let’s do another one…

Growth PPC reflects the country’s current production possibilities if the country’s resources were frozen in time… BUT… they’re constantly changing If the quantity or quality of available land, labor, or capital changes, then the curve will move. More labor = more production = maximum amount of goods possible to produce increases New inventions can allow workers to produce more goods at lower costs Look at the graph again. With all of this information in mind, which way do you think the curve will shift?

RIGHT!! What about when a country’s production capacity decreases? Which way will the curve shift?

Cost Cost is not necessarily money. Cost is the alternative we give up when we choose one option over the other. Opportunity COST – we can use PPC to see the OC involved in a decision

Your turn…

Opportunity Cost and Production Possibilities E.2, E.8

Part II Quick review: What are trade-offs? What is opportunity cost? What is thinking at the margin? What does the PPF show/illustrate?

Where are the points of efficiency? Where are the points of inefficiency? Which point(s) are not feasible?

Growth Which way will the PPF shift to show growth? Decrease in growth? What causes the curve to shift?