Survey of Economics Irvin B. Tucker Chapter 2 Production Possibilities, Opportunity Cost, and Economic Growth Lecture Slides Survey of Economics Irvin B. Tucker © 2011 South-Western, a part of Cengage Learning

What will I learn in this chapter? Having learned that scarcity forces choices, here you will study choices people make in more detail © 2011 South-Western, a part of Cengage Learning

What are the three fundamental economic questions? What to produce? How to produce? For whom to produce? © 2011 South-Western, a part of Cengage Learning

What are two key concepts in this chapter? Opportunity costs Marginal analysis © 2011 South-Western, a part of Cengage Learning

What is opportunity cost? The best alternative sacrificed for a chosen alternative © 2011 South-Western, a part of Cengage Learning

What opportunity cost may you now be experiencing? The most money that you could be making if you were somewhere else instead of studying these slides © 2011 South-Western, a part of Cengage Learning

Can opportunity cost be something other than money? Yes, the most desired good or service or use of time that you are presently giving up is an opportunity cost © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Opportunity Cost Exhibit 2.1 The Links Between Scarcity, Choice, and opportunity Cost Choice Scarcity © 2011 South-Western, a part of Cengage Learning

What is marginal analysis? An examination of the effects of additions to or subtractions from a current situation © 2011 South-Western, a part of Cengage Learning

What is an example of marginal analysis? When your benefit of studying these slides exceeds the opportunity cost, you will spend time studying these slides © 2011 South-Western, a part of Cengage Learning

What is a production possibilities curve? A curve that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is technology? The body of knowledge and skills applied to how goods are produced © 2011 South-Western, a part of Cengage Learning

What assumptions underlie the production possibilities model? Fixed resources Fully employed resources Technology unchanged © 2011 South-Western, a part of Cengage Learning

What is the conclusion of the production possibilities curve? Scarcity limits an economy to points on or below its production possibilities curve © 2011 South-Western, a part of Cengage Learning

What are efficient points? Because all the points along the curve are maximum output levels with given resources and technology, they are called efficient points © 2011 South-Western, a part of Cengage Learning

What happens when we move between two efficient points? A movement between any two efficient points on the curve means that more of one product is produced only by producing less of the other © 2011 South-Western, a part of Cengage Learning

Exhibit 2.2 Production Possibilities Curve A 160 Unattainable point Z B 140 120 All points on curve are efficient 100 (billions of units per year) Output of military goods U C 80 Inefficient point 60 40 Attainable points PPC 20 D 20 40 60 80 100 120 © 2011 South-Western, a part of Cengage Learning Output of consumer goods (billions of units per year)

What is the law of increasing opportunity costs? The principle that the opportunity cost increases as production of one output expands © 2011 South-Western, a part of Cengage Learning

Exhibit 2.3 The Law of Increasing Opportunity Costs 80 B 70 60 C 50 Tanks (thousands per year) 40 30 20 PPC 10 D 10 20 30 40 50 60 © 2011 South-Western, a part of Cengage Learning Sailboats (thousands of units per year)

What is economic growth? The ability of an economy to produce greater levels of output, represented by an outward shift of its production possibilities curve. © 2011 South-Western, a part of Cengage Learning

What makes possible economic growth? Increase in resources Technological change © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Economic growth Technological Advances Increase in Resources © 2011 South-Western, a part of Cengage Learning

Exhibit 2.4 An Outward Shift of the Production Possibilities Curve 80 B 70 60 Computers (thousands per year) 50 A c 40 30 20 10 PPC1 PPC2 100 200 300 400 500 © 2011 South-Western, a part of Cengage Learning Pizzas (millions per year)

What happens when a country does not invest in new technology? Everything else being equal, the country will not grow © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is investment? The accumulation of capital, such as factories, machines, and equipment, that is used to produce goods and services © 2011 South-Western, a part of Cengage Learning

What is the opportunity cost of investment? A country must decide how to allocate its resources between producing capital goods and consumer goods. © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What does producing capital exceeding the amount required to replenish its depreciated capital? Economic growth and a higher standard of living © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Exhibit 2.5 Alpha’s and Beta’s Present and Future Production Possibilities Curves (a) Low-investment country Alpha (b) High-investment country Beta Capital goods (quantity per year) 2010 curve Capital goods (quantity per year) 2000 and 2010 curve 2000 curve A B Kb Ka A Ca Cc Cb Consumer goods (quantity per year) Consumer goods (quantity per year) © 2011 South-Western, a part of Cengage Learning

What conclusion can we make about investments? A nation can accelerate growth by increasing production of capital goods in excess of the capital being worn out © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning END © 2011 South-Western, a part of Cengage Learning