1 © 2010 South-Western, a part of Cengage Learning Chapter 2 Production Possibilities, Opportunity Cost, and Economic Growth Microeconomics for Today Irvin B. Tucker

© 2010 South-Western, a part of Cengage Learning 2 What will I learn in this chapter? Having learned that scarcity forces choices, here you will study the choices people make in more detail Having learned that scarcity forces choices, here you will study the choices people make in more detail

© 2010 South-Western, a part of Cengage Learning 3 What are the three fundamental economic questions? 1.What to produce? 2.How to produce? 3.For whom to produce?

© 2010 South-Western, a part of Cengage Learning 4 What are two key concepts in this chapter? Opportunity costs Opportunity costs Marginal analysis Marginal analysis

© 2010 South-Western, a part of Cengage Learning 5 What is opportunity cost? The best alternative sacrificed for a chosen alternative The best alternative sacrificed for a chosen alternative

© 2010 South-Western, a part of Cengage Learning 6 What opportunity cost am I experiencing now? The most money that you could be making if you were somewhere else instead of studying these slides The most money that you could be making if you were somewhere else instead of studying these slides

© 2010 South-Western, a part of Cengage Learning 7 Can opportunity cost be something other than money? Yes, that most desired activity that you are presently giving up is considered an opportunity cost Yes, that most desired activity that you are presently giving up is considered an opportunity cost

© 2010 South-Western, a part of Cengage Learning 8 Scarcity Choice Opportunity Cost

© 2010 South-Western, a part of Cengage Learning 9 What is marginal analysis? An examination of the effects of additions to or subtractions from a current situation An examination of the effects of additions to or subtractions from a current situation

© 2010 South-Western, a part of Cengage Learning 10 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 When your benefit of studying these slides exceeds the opportunity cost, you will spend time studying these slides

© 2010 South-Western, a part of Cengage Learning 11 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 A curve that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology

© 2010 South-Western, a part of Cengage Learning 12 What is technology? The body of knowledge and skills applied to how goods are produced The body of knowledge and skills applied to how goods are produced

© 2010 South-Western, a part of Cengage Learning 13 What assumptions underlie the production possibilities model? 1.Fixed resources 2.Fully employed resources 3.Technology unchanged

© 2010 South-Western, a part of Cengage Learning 14 What is the conclusion of the production possibilities curve? Scarcity limits an economy to points on or below its production possibilities curve Scarcity limits an economy to points on or below its production possibilities curve

© 2010 South-Western, a part of Cengage Learning 15 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 Because all the points along the curve are maximum output levels with given resources and technology, they are called efficient points

© 2010 South-Western, a part of Cengage Learning 16 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 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

© 2010 South-Western, a part of Cengage Learning 17 A Output of military goods Output of consumer goods Production Possibilities Curve B C D U Inefficient point Z Unattainable point All points on curve are efficient

© 2010 South-Western, a part of Cengage Learning 18 What is the law of increasing opportunity costs? The principle that the opportunity cost increases as production of one output expands The principle that the opportunity cost increases as production of one output expands

© 2010 South-Western, a part of Cengage Learning 19 A Output of military goods Output of consumer goods The Law of Increasing Opportunity Cost B C D All points on curve are efficient

© 2010 South-Western, a part of Cengage Learning 20 What is economic growth? The ability of an economy to produce greater levels of output, an outward shift of its production possibilities curve The ability of an economy to produce greater levels of output, an outward shift of its production possibilities curve

© 2010 South-Western, a part of Cengage Learning 21 What makes possible economic growth? Research and development of new technologies Research and development of new technologies Increase production in excess of worn out capital Increase production in excess of worn out capital

© 2010 South-Western, a part of Cengage Learning 22 Technological advance Economic growth

© 2010 South-Western, a part of Cengage Learning 23 Computers Pizzas Technological Advance

© 2010 South-Western, a part of Cengage Learning 24 Computers Pizzas Technological Advance

© 2010 South-Western, a part of Cengage Learning 25 What happens when a country does not invest in new technology? Everything else being equal, the country will not grow Everything else being equal, the country will not grow

© 2010 South-Western, a part of Cengage Learning 26 What is investment? The accumulation of capital, such as factories, machines, and inventories, that is used to produce goods and services The accumulation of capital, such as factories, machines, and inventories, that is used to produce goods and services

© 2010 South-Western, a part of Cengage Learning 27 What is the opportunity cost of investment? The consumer goods that could have been purchased with the money spent for plants and other capital The consumer goods that could have been purchased with the money spent for plants and other capital

© 2010 South-Western, a part of Cengage Learning 28 What does an increase in investments make possible in the future? Economic growth and more goods and services Economic growth and more goods and services

© 2010 South-Western, a part of Cengage Learning 29 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 A nation can accelerate growth by increasing production of capital goods in excess of the capital being worn out

© 2010 South-Western, a part of Cengage Learning 30 END