McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Trade-Offs Scarcity implies trade-offs TANSTAAFL What determines our trade-offs? 2-1

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Opportunity Costs Definition: Value of resources in their best alternative use Examples  Going to a movie  Studying  Cash under pillow  Home canning  Wood chopping 2-2

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. The Economics of Star Trek 2-3

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Changing Opportunity Costs and Star Trek PhasersSalt Shakers A015 B114 C212 D3 9 E4 5 F

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Graph of Star Trek Possibilities 2-5

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-6 Production Possibilities Curve A production possibilities curve illustrates opportunity cost by showing trade-offs among choices. It shows the MAXIMUM number of outputs that can be achieved from a GIVEN AMOUNT of inputs.

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved A Production Possibilities Curve for an Individual Economics grade History grade E: 20 hours of history, 0 hours of economics E D C B A: 20 hours of economics, 0 hours of history A Hours of study in history Grade in history Hours of study in economics Grade in economics

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-8 Increasing Marginal Opportunity Cost Butter Slope is flat at A. Low opportunity cost of guns. Slope is steep at B. High opportunity cost of guns. Guns B A The principle of increasing marginal opportunity cost states that opportunity costs increase as you produce more of one product.

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-9 A Production Possibilities Table for Society % of resources devoted to production of guns Number of guns % of resources devoted to production of butter Pounds of butterRow A B C D E F

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved PPC for Society 1211 A Butter Guns gun 5 pounds of butter guns 2 pounds of butter B C D E F guns 1 pound of butter

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved Efficiency and Inefficiency Guns Butter CD A B Efficient points Inefficient point Unattainable point

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved Shifts in the PPC Neutral Technological Change Butter A Guns 0 Biased Technological Change 0 B Butter Guns C B D C A