Mr. Hellums AP Macroeconomics Basic Economic Concepts – Scarcity, Opportunity Cost, PPC

Key Assumptions in Economics People are rationally self-interested – They seek to maximize their utility (happy points)

Key Assumptions in Economics Marginal Analysis - Decisions are made by comparing Marginal Benefit (MB) to Marginal Cost (MC) of a decision Example: You are considering having the last piece of cake. You already had a piece. –Compare the marginal benefit to marginal cost –MB = It tastes really good –MC = Expansion of waistline. Jealousy of peers. –If MB>MC, EAT! –If MB<MC, let someone else have it.

Key Assumptions in Economics Ceteris Paribus – Economists hold factors constant, except for what ’ s being considered – Ex: If Messi signs for Liverpool, how will it affect their chances of winning the league, assuming nothing else changes? No “what ifs”

Basic Economic Vocabulary Economics – The study of choices people make to satisfy their needs and wants Microeconomics – The study of how individuals and firms deal with scarcity Macroeconomics – The study of how society as a whole deals with scarcity

Basic Economic Vocabulary Needs – Necessities for survival Wants – Goods and services consumed beyond what is necessary for survival

Basic Economic Vocabulary Goods – Physical objects that can be purchased Services – Actions or activities performed for a fee Consumers – People who purchase goods and services Producers – People who supply goods and services

Resources a.k.a. The Factors of Production Economists classify resources into 4 categories 1.Land Natural resources The payment for Land is RENT 2.Labor Human resources The payment for Labor is WAGES 3.Capital (a product of Investment) Tools, machines, factories The payment for Capital is INTEREST 4.Entrepreneurship The special ability of risk-takers to combine land, labor and capital in new ways in order to make profit The payment for Entrepreneurship is PROFIT

Why can’t we have all we want? Because… Available resources are limited  Land (57,506,000 sq mi. & not even all habitable!)  Labor (7.2 bil. souls x 24 hrs a day)  Capital (less than ∞, trust me)  Entrepreneurship (not everybody is Jeff Bezos) Human desires are boundless What do we call this? SCARCITY!

Why do we have to make choices? I WANT IT ALL!! SCARCITY CHOICE Scarcity Forces You to CHOOSE

Opportunity Cost The opportunity cost of a choice is the value of the next best alternative foregone

“It’s a Jungle Out There…” Zebra’s and Lions do it, too –How fast do they run? –Why do they wait? Life is difficult in the jungle –the opportunity cost of “poor” decisions is very high…

Higher or Lower Opportunity Costs How fast would do you normally drive on the freeway? What about on a motorcycle? What about on a motorcycle with no helmet? What if you are taking a very sick friend to the ER?

Pop the “Question” “Will You Marry Me?” Yes or no? –What’s the opportunity cost of accepting? –What’s the opportunity cost of refusing? How does the “guy” increase the chance of getting a good outcome? –“Diamonds are Forever” Economic decisions are made at the “margin”

“Did He Really Say That?” An early “Prom” proposal What’s the best response? –What’s the opportunity cost of accepting? –What’s the opportunity cost of refusing? –How can you lower your opportunity cost? How does your view change as the Prom approaches? Economic decisions are made at the “margin”

The PPC A production possibility curve (PPC) is used to illustrate opportunity cost. – Sometimes called PPF (PP Frontier)

The Production Possibility Curve A production possibility curve measures the maximum combination of outputs that can be achieved in an economy with current resources and technology. It slopes downward from left to right.

PPC shape The production possibility curve is generally bowed outward. – Some resources are better suited for the production of some goods than others.

Increasing Opportunity Cost

Inefficiency Any point within the production possibility curve represents inefficiency. Causes – unemployed resources, government policies, natural disasters

Unattainable Any point outside the production possibility curve represents something unattainable, given present resources and technology.

Efficiency and Inefficiency Guns Butter CD A B Efficient points Inefficient point Unattainable point, given available technology, resources and labor force

Tom’s Trade-offs: The Production Possibility Frontier

Can we produce outside the production possibility curve? – Can we have more?

Shifts in the Production Possibility Curve Society can produce more output if: – Technology is improved. – More resources are discovered. – Economic institutions get better at fulfilling our wants.

Economic Growth Economic growth results in an outward shift of the PPF because production possibilities are expanded. The economy can now produce more of everything. Production is initially at point A (20 fish and 25 coconuts),  it can move to point E (25 fish and 30 coconuts).

Examples of Shifts in the Production Possibility Curve Test your understanding: – A meteor hits the world and destroys half the earth’s natural resources. – Nanotechnology is perfected that lowers the cost of manufactured goods.

Examples of Shifts in the Production Possibility Curve Test your understanding: A new technology is discovered that doubles the speed at which all goods can be produced. Global warming increases the cost of producing agricultural goods.