1. REVIEW Explain relationship between scarcity and choices
Differentiate between positive & normative
Differentiate between microeconomics and macroeconomics
Explain tradeoffs and opportunity costs
Name 10 different teachers at RMHS

2. Homework Answers: Chapter 2 P&A #7
Two of the statements are clearly normative.
"5. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly"
"9. The government should restructure the welfare system along the lines of a 'negative income tax.'"
Both are suggestions of changes that should be made, rather than statements of fact, so they are clearly normative statements.

3. The 4 Factors of Production
We live in a world of limited resources and unlimited wants

4. The Four Factors of Production
ALL resources can be classified as one of the following four factors of production:
1. Land -All natural resources that are used to produce goods and services. (Ex: water, sun, plants, animals)
2. Labor -Any effort a person devotes to a task for which that person is paid. (Ex: manual laborers, lawyers, doctors, teachers, waiters, etc.)
3. Capital -
Physical Capital- Any human-made resource that is used to create other goods and services ( Ex: tools, tractors, machinery, buildings, factories, etc.)
Human Capital- Any skills or knowledge gained by a worker through education and experience

5. The Four Factors of Production Cont.
4. Entrepreneurship -ambitious leaders that combine the other factors of production to create goods and services.
Examples-Henry Ford, Bill Gates, Inventors, Store Owners, etc.
Entrepreneurs:
Take The Initiative
Innovate
Act as the Risk Bearers
So they can obtain _________.
PROFIT
Profit = Revenue - Costs

6. Unit 1: Basic Economic Concepts 1.3 Production Possibilities Frontier

7. Society has unlimited wants but limited resources
WE HAVE A PROBLEM!!
Scarcity
Society has unlimited wants but limited resources

8. Scarcity Means Governments Must Chooses Between Guns and Butter
Governments have to decide how many resources to devote toward the military and how many resources to devote toward consumer goods
Classic case of guns versus butter 8

9. "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.”
“The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement.”
“We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.”
-Dwight Eisenhower Speaking against the military build up of the cold war 9

10. The USS Dwight Eisenhower
Launched in 1975 and cost $679 million ($4.5 billion in 2007 dollars) 10

11. The Production Possibilities Curve (PPC)
Is an Economic Model

12. What is the Production Possibilities Curve?
A production possibilities curve (or frontier) is a model that shows alternative ways that an economy can use its scarce resources
This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.

13. Key Assumptions of the PPC:
Only two goods can be produced
Full employment of resources
Fixed Resources and technology (Ceteris Paribus)

14. Production “Possibilities” Tablef 14 12 9 5 2 4 6 8 10
Bikes
Computers
Each point represents a specific combination of goods that can be produced given full employment of resources.
NOW GRAPH IT: Put bikes on y-axis and computers on x-axis

15. Production Possibilities Curve
How does the PPC demonstrates scarcity and efficiency? 14 12 10 8 6 4 2
Impossible/Unattainable
(given current resources) A B G C
Bikes
Efficient D
Inefficient/ Unemployment E
Computers

16. Opportunity Cost
How does the PPC graphically demonstrates trade-offs and opportunity costs?
Example:
1. The opportunity cost of moving from a to b is…
2 Bikes
2.The opportunity cost of moving from b to d is…
7 Bikes
3.The opportunity cost of moving from d to b is…
4 Computer
4.The opportunity cost of moving from f to c is…
0 Computers
5.What can you say about point G?
Unattainable

17. The Production Possibilities Curve (or Frontier)
Consumer Goods- created for direct consumption (example: pizza)
Capital Goods- created for indirect consumption (oven, blenders, knives, etc.)
Goods used to make consumer goods

18. Production Possibilities
A B C D E
Economics Class
Computer Class
List the Opportunity Cost of moving from
a-b
b-c
c-d
d-e

19. Production Possibilities
Constant Opportunity Cost- Resources are easily adaptable for producing either good.
Result is a straight line PPC (not common)

20. Production Possibilities
A B C D E
PIZZA
ROBOTS
List the Opportunity Cost of moving from
a-b
b-c
c-d
d-e

21. Production Possibilities
Law of Increasing Opportunity Cost-
As you produce more of any good, the opportunity cost (forgone production of another good) will increase.
Why? Resources are NOT easily adaptable to producing both goods.
Result is a bowed out (Concave) PPC

22. Constant vs. Increasing Opportunity Cost
Identify which product would have a straight line PPC and which would be bowed out?
Corn
Cactus
Wheat
Pineapples

23. The Production Possibilities Curve and Efficiency

24. Two Types of Efficiency
Productive Efficiency-
Products are being produced in the least costly way.
This is any point ON the Production Possibilities Curve
Allocative Efficiency-
The products being produced are the ones most desired by society.
This optimal point on the PPC depends on the desires of society. 24

25. Productive and Allocative Efficiency
Which points are productively efficient?
Which are allocatively efficient? 14 12 10 8 6 4 2
Productively Efficient combinations are A through D A B G
Allocative Efficient combinations depend on the wants of society
(What if this represents a country with no electricity?)
Bikes C E F D
Computers 25

26. Why two types of efficiency? Is combination “A” efficient?
Yes and No. It is productively efficient but it is not the combination society wants
Size 20 running shoes A
Size 10 running shoes

27. 2008 Audit Exam
17.B

28. 2008 Audit Exam A

29. Shifting the Production Possibilities Curve

30. Production Possibilities
Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
Fixed Resources (4 Factors)
Fixed Technology
What if there is a change?

31. Production Possibilities
What happens if there is an increase in population?
Computers
Pizzas

32. Production Possibilities
What happens if there is an increase in population?
Computers
Pizzas 32

33. Production Possibilities
What if there is a technology improvement in pizza ovens
Computers
Pizzas 33

34. Production Possibilities
What if there is a technology improvement in pizza ovens
Computers
Pizzas 34

35. Capital Goods and Future Growth
Countries that produce more capital goods will have more growth in the future.
Panama – Favors Consumer Goods
Mexico – Favors Capital Goods
Current
PPC
Future
PPC
Future
PPC
Capital Goods
Current
PPC
Capital Goods
Consumer goods
Consumer goods
Panama
Mexico

36. 3 Shifters of the PPC Production Possibilities
4 Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
Fixed Resources (4 Factors)
Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade

37. PPC Practice Draw a PPC showing changes for each of the following:
3 PPC for Computers (y axis) and Pizza New computer making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
4 PPC for Capital Goods (y axis) and Consumer Goods
4. Destruction of power plants leads to severe electricity shortage
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education

38. New computer making technology A shift only for computers
Question #1
New computer making technology
A shift only for computers
Computers
Pizzas 38

39. Question #2 Decrease in the demand for pizza The curve doesn’t shift!
A change in demand doesn’t shift the curve
Computers
Pizzas 39

40. Mad cow disease kills 85% of cows A shift inward only for Pizza
Question #3
Mad cow disease kills 85% of cows
A shift inward only for Pizza
Computers
Pizzas 40

41. Question #4 Destruction of power plants
Decrease in resources decrease production possibilities for both
Capital Goods (Guns)
Consumer Goods (Butter) 41

42. Question #5 Faster computer hardware
Quality of a resource improves shifting the curve outward
Capital Goods (Guns)
Consumer Goods (Butter) 42

43. Question #6 Many workers unemployed The curve doesn’t shift!
Unemployment is just a point inside the curve
Capital Goods (Guns)
Consumer Goods (Butter) 43

44. Question #7 Significant increases in education
The quality of labor is improved. Curve shifts outward.
Capital Goods (Guns)
Consumer Goods (Butter) 44