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Opportunity Cost, Specialization, and the PPC Chapter 1, Section 2 Academic Economics

Directions for the simulation Assume the role of a farmer – ½ are Farmer A, ½ are Farmer B Get a copy of your “Farmers directions” – Examine your goal. Choose a production option. Get your potatoes and pineapples from your “farmland” region. Trade with the same person every time – After each round, copy down how well you did on the ledger. Try to meet your goal by varying your production option

Debrief How did it feel to be a farmer in region A? – In region B? In real life, why might two different areas/countries have different production capabilities? – Can you think of examples? How were you able to meet your goal? – Specialization and trade Did one group of farmers benefit more from specialization and trade? – Why or why not?

Goals for today Understand why specialization and trade are more beneficial than “going it alone” Learning what a PPC graph is and how it is used Identify the terms opportunity cost, absolute advantage, and comparative advantage.

Production Possibilities Curve/Frontier The production possibilities curve shows the maximum combination of goods and services that can be produced from a given amount of resources. Classic Example—military spending vs. domestic programs (“guns or butter”) Using a production possibilities curve, a producer can decide how to use resources.

Marooned Read the story of Selkin and Pirate Jack. As you read, take note of the definitions of the following terms: – Absolute advantage – Comparative advantage – Specialization

Absolute advantage: the ability to produce more of a good or service than competitors, using the same amount of resources

Opportunity Cost: the value (or “cost”) of making a choice to produce something different

Specialization: performing only the function that you do best, or hold a comparative advantage in

Comparative advantage: when one person’s opportunity cost for producing an item is lower than anothers

Rank the top 5 things you would do with an extra hour of time tonight… Opportunity cost = The value of the next best alternative to your choice which is given up – All remaining options are “trade-offs”, but next best to your choice is the opportunity cost