1. Bellringer 1. Which of the following is an example of a resource?
I. petroleum
II. A factory
III. A cheeseburger dinner
I only
II only
III only
I and II only
I, II, and III
2. Suppose that you prefer reading a book you already own to watching TV and that you prefer watching TV to listening to music. If these are your only 3 choices, what is the opportunity cost of reading?
Watching TV and listening to music
Watching TV
Listening to music
Sleeping
The price of the book

2. Adam Smith, Absolute Advantage/Comparative Advantage, & Production Possibilities

3. What was the most important document written in 1776?
Walk around the room asking students the answer to this question.

4. What was the Most Important Document Written in 1776?
Responses
Number of Results
Declaration of Independence (1776) Constitution (1787) Wealth of Nations (1776) It Depends Emancipation Proclamation (1862) Magna Carta (1215) Some Economics Document? The American One?
138 27 1 2 4

5. What was the Most Important Document Written in 1776?
Responses
Number of Results
Declaration of Independence (1776)
138
The Constitution (1787) 27
Articles of Confederation (1777) 1
Emancipation Proclamation (1862)
Magna Carta (1215) 2
Some Economics Document? 4
The American one?
Not sure 6
Wealth of Nations (1776)
It Depends (correct)
Total
182

6. ECON 200 students’ answers in regards to the question, what was the most important document written in 1776?
Declaration of Independence 87
The Constitution 40
1787
The Bill of Rights 5
1789
The Magna Carta 3
1215
The Bible

7. The Great Gatsby 2
The Independence of Britain
Keynes
The document that says “I’m
the Coolest.”
The Wealth of Nations 14

8. The Father of Economics
What was the most important
document written in 1776?
The Wealth of Nations
written by
Adam Smith
Walk around the room asking students the answer to this question.
The Father of Economics

9. And the genes continue today….
He is my great, great, great, great,
great grandfather on my mother’s side

11. What made The Wealth of Nations
“THE” most important document
written in 1776?
Adam Smith wrote about a pin factory.
What did they call the workers in the
pin factory?
Just a bunch of pinheads.

12. When he first observed the factory,
he noticed that each worker was
producing his or her own pins. By
the end of the day, the total
production by each worker was
20 pins. He stated that each worker
should specialize in the production
stage rather than produce his or her
own pins. Through specialization,
the total output by the factory
increased to 48,000 pins per day.
(Page 11, Wealth of Nations)

13. One person draws the wire.
One person straightens the wire.
One person cuts the wire.
One person points the wire.
One person grinds the wire at the
top to receive the head of the pin.
One person makes the head of
the pin.
One person attaches the head to
the pin.

14. Any illegal activity that you can think of
I am going to prove that specialization
works. I am going to name a state and
you tell me what that state specializes
in:
Idaho
Potatoes
Florida
Oranges
Oil or cattle
Texas
Michigan
Automobiles
Nevada
Any illegal activity that
you can think of

15. Absolute and Comparative Advantage
Betty types 120 w.p.m. with 0 errors
Jim types 60 w.p.m. with 0 errors
Who should do the typing, Betty or Jim?
Betty.
Why?
Betty can type ABSOLUTELY faster than
Jim can. What type of advantage does
Betty have over Jim?
Absolute Advantage

16. Absolute Advantage--
One entity can produce something
either faster than or greater than
another entity.

17. I forgot to tell you--Betty is a lawyer.
A lawyer earns $60 an hour.
A secretary earns $6 an hour.
A 600-word document has to be
typed, how long does it take each
person to type this document?
How long does it take Betty to type
this document?
How long does it take Jim to type
this document?

18. Who should do the typing?
Jim
Comparative Advantage
One entity can produce something
at a LOWER MARGINAL OPPORTUNITY
PRODUCTION COST than another
entity

19. Comparative Advantage
Take absolute advantage and KICK
IT OUT THE DOOR. The more
important of the two is--
Comparative Advantage

20. Person-hours required
U.S Canada
Maple Syrup
Copper Wire
Which country has the absolute
advantage in the production of Maple
Syrup? In Copper Wire?

21. Person-hours required
U.S Canada
Maple Syrup
Copper Wire
Kick it out the door!
What did I tell you to do with Absolute
Advantage?

22. Person-hours required
U.S Canada
Maple Syrup
Copper Wire
More importantly, which country has
the Comparative Advantage in Maple
Syrup? In Copper Wire? And Why?

23. Person-hours required
U.S Canada
U.S. 2 1
Maple Syrup
Copper Wire 2 x
= 10
Canada
2 x 1 2 + +
= 14 11 15
U.S. saves one-man hour
Canada saves one-man hours

24. Person-hours required
U.S Canada
U.S. 2 1
Maple Syrup
Copper Wire 2 x
= 10
Canada 1 2 +
2 x +
= 14 11 15
Should the U.S. keep the 2 barrels of maple syrup
and Canada 2 miles of copper wire?

25. U.S. Canada U.S. 2 1 Maple Syrup 5 8 Copper Wire 6 7 2 x = 10 Canada 1
Person-hours required
U.S Canada
U.S. 2 1
Maple Syrup
Copper Wire 2 x
= 10
Canada 1 2 +
2 x +
= 14 11 15
No! The U.S. should trade one barrel of
maple syrup for one mile of copper wire.

26. Figuring Comparative Advantage
Output Problems
Input Problems
Opportunity Cost=Total Cost/Total Production
Opportunity Cost=Total Input/Total Forgone

27. Amount Produced per hr. U.S. Canada Maple Syrup (gal.) 40 20
Copper Wire (mile)
Which country has the absolute
advantage in the production of Maple
Syrup? In Copper Wire? What about Comp. Adv.

28. After Some Math Magic…
U.S. should produce Wire, Canada should produce Syrup
You could also look at it like this (b/c we are looking for who has a lower MARGINAL opportunity cost):
US:
1 syrup= _____ wire; 1 wire=_____syrup
Canada:
1/2 2
1/4 4

29. Person-hours required
U.S Canada
Maple Syrup
Copper Wire
Which country has the absolute
advantage in the production of Maple
Syrup? In Copper Wire?

30. After Some Math Magic…
U.S. should produce Syrup, Canada should produce Wire
If the numbers represent the same thing, it will be no different, no matter which method you are looking at

31. More on figuring Comparative Advantage to come…

32. Production
Possibilities
Curve or
Frontier

33. The Production Possibilities Frontier
The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. 14

34. The Production Possibilities Frontier
Quantity of
Computers
Produced
3,000 C A
2,200
600 B
700
2,000
Production
possibilities
frontier
1,000
300 D
Quantity of
1,000
Cars Produced

35. The Production Possibilities Frontier
Concepts illustrated by the production possibilities frontier
Efficiency
Trade-offs
Opportunity cost
Economic growth 21

36. A Shift in the Production Possibilities Frontier
Quantity of
Computers
Produced
4,000
3,000
1,000
2,300
650 G
2,200
600 A
Quantity of
Cars Produced

37. You must make yourself
worse off in the short run
to make yourself better
off in the long run.

38. Study
Leisure

39. Capital
Goods
Consumption
Goods

40. Theme Song: http://www.youtube.com/watch?v=H8Uf8Zj9W24&feature=related

42. 3 Hour Tour

44. The ship set ground on the shore of this uncharted desert isle
The ship set ground on the shore of this
uncharted desert isle

45. http://images. google. com/imgres. imgurl=www. timvp. com/gillign2
26svnum%3D10%26hl%3Den%26lr%3D%26ie%3DUTF-8%26oe%3DUTF-8

47. When Stranded on a Deserted Island What do you “Need?”
FOOD!!!

49. But you realize, doing this is going to get real old, real fast!
So what should I do?

50. All the while, making myself worse off
All the while, making myself worse off

52. http://www. riveroflifefarm

53. Capital Goods Consumption Goods By producing more capital goods
relative to consumption goods,
the economy’s Production-possibilites
curve to shifts OUTWARD and shifts outward FASTER.
Consumption
Goods

55. P P
Curve

56. Capital
This is GOOD!
Consumption
If the PP shifts outward

57. Capital
This is BAD!!
Consumption
If the PP shifts inward

58. Capital
Goods
Consumption
Goods
There are five variables that
shift the PP outward--

59. Five Variables that Shift the PP Outward:
Increase the productive labor force
(productivity).
Increase the quantity and quality of natural
resources.
3. Increase the quantity and quality of capital.
4. Increase health and education.
5. Increase technology.

60. Japan
1940

61. What did Japan do on
December 7, 1941 ?
Capital
Japan 1941
What capital
goods
did Japan
produce
in 1940?
rice
Consumption
What consumption
goods did it produce?

63. What did the U.S. do to
Japan for this dirty deed?
Capital
Japan 1945
rice
Consumption

64. morning of August 6, 1945 Nagasaki Hiroshima 11:02 am, August 9, 1945
morning of August 6, 1945
Nagasaki
Hiroshima
11:02 am, August 9, 1945

65. What do you think happened
to Japan’s productive labor
force?
Capital
Japan 1945
rice
Consumption

66. What do you think happened
to the quantity and quality of its
natural resources?
Capital
Japan 1945
rice
Consumption

67. What do you think happened to
the quantity and quality of
its capital stock?
Capital
Japan 1945
rice
Consumption

68. What do you think happened to its health and education? Capital
Japan 1945
rice
Consumption

69. What do you think happened to
its technology?
Capital
Japan 1945
rice
Consumption

70. What happened to Japan’s
Capital
Japan 1945
rice
Consumption

71. Capital
Goods
Consumption
Goods

72. http://www. ellsworthamerican

73. Capital
Goods
Consumption
Goods

74. The Classic PPC Example

75. Guns
Military
Butter
Consumption goods

76. Employment of labor hours
PPF Example
Producing one computer requires 100 hours labor.
Producing one ton of wheat requires 10 hours labor. E D C B A
Wheat
Computers
Production
Employment of labor hours
50,000
500
50,000
40,000
10,000
25,000
1,000
400
Suggestion:
Show first row. Explain how we get the production numbers from the employment numbers. Then, show the rest of the employment numbers, and give students 3 minutes to compute the production numbers for each employment allocation.
2,500
250
4,000
100
5,000 76

77. PPF Example E D C B A Point on graph Production Com-puters Wheat A 500B
400
1,000 C
250
2,500 D
100
4,000 E
5,000 E D C B A 77 77

78. ACTIVE LEARNING 1 Points off the PPF
A. On the graph, find the point that represents (100 computers, 3000 tons of wheat), label it F. Would it be possible for the economy to produce this combination of the two goods? Why or why not? B. Next, find the point that represents (300 computers, 3500 tons of wheat), label it G. Would it be possible for the economy to produce this combination of the two goods?
This exercise leads students to discover for themselves that points under the PPF are possible but inefficient, while points above it are not possible.

79. ACTIVE LEARNING 1 Answers
Point F: 100 computers, 3000 tons wheat
Point F requires 40,000 hours of labor. Possible but not efficient: could get more of either good w/o sacrificing any of the other. F

80. ACTIVE LEARNING 1 Answers
Point G: 300 computers, 3500 tons wheat
Point G requires 65,000 hours of labor. Not possible because economy only has 50,000 hours. G

81. The PPF: What We Know So Far
Points on the PPF (like A – E)
possible
efficient: all resources are fully utilized
Points under the PPF (like F)
not efficient: some resources underutilized (e.g., workers unemployed, factories idle)
Points above the PPF (like G)
not possible 81

82. The PPF and Opportunity Cost
Recall: The opportunity cost of an item is what must be given up to obtain that item.
Moving along a PPF involves shifting resources (e.g., labor) from the production of one good to the other.
Society faces a tradeoff: Getting more of one good requires sacrificing some of the other.
The slope of the PPF tells you the opportunity cost of one good in terms of the other. 82

83. The PPF and Opportunity Cost
The slope of a line equals the “rise over the run,” the amount the line rises when you move to the right by one unit.
–1000
slope =
= –10
100
Here, the opportunity cost of a computer is 10 tons of wheat.
Here, the “rise” is a negative number, because as you move to the right, the line falls (meaning wheat output is reduced).
Moving to the right involves shifting resources from the production of wheat (which causes wheat output to fall) to the production of computers (which causes computer production to rise). Producing an additional computer requires the resources that would otherwise produce 10 tons of wheat. 83

84. ACTIVE LEARNING 2 PPF and Opportunity Cost
In which country is the opportunity cost of cloth lower?
FRANCE
ENGLAND
This exercise reinforces the material on the preceding slide. It is especially useful if you plan to cover Chapter 3 (Interdependence and the Gains from Trade) after completing Chapter 2.

85. ACTIVE LEARNING 2 Answers
England, because its PPF is not as steep as France’s.
FRANCE
ENGLAND
There are two ways to get the answer.
The hard way is to compute the slope of both PPFs. The slope of France’s PPF equals -600/300 = -2, meaning that France must give up two units of wine to get an additional unit of cloth. The slope of England’s PPF = -200/300 = -2/3, meaning that England only must sacrifice 2/3 of a unit of wine to get an additional unit of cloth. Thus, the opportunity cost of cloth is lower in England than France.
The question, however, does not ask for the numerical values of the opportunity cost of cloth in the two countries. It only asks which country has a lower opportunity cost of cloth.
There is an easy way to determine the answer. Students must remember that the slope of the PPF equals the opportunity cost of the good measured on the horizontal axis. Then, students can simply “eyeball” the two PPFs to determine which is steepest. From what the graphs show, it’s pretty easy to see that England’s PPF isn’t as steep, and therefore the opportunity cost of cloth is lower in England than in France.

86. Economic Growth and the PPF
With additional resources or an improvement in technology, the economy can produce more computers,
Economic growth shifts the PPF outward.
more wheat,
The PPF shows the tradeoff between the outputs of different goods at a given time, but the tradeoff can change over time.
For example, over time, the economy might get more workers (or more factories or more land). Or, a more efficient technology might be invented. Both events—an increase in the economy’s resources or an improvement in technology—cause an expansion in the set of opportunities. That is, both allow the economy to produce more of one or both goods.
This is a simple example of economic growth, an important subject that gets its own chapter in the macroeconomics portion of the textbook.
In the example shown on this slide, economic growth causes a parallel outward shift of the PPF. Since the new PPF is parallel to the old one, the tradeoff between the two goods is the same. However, this need not always be the case. For example, if a new technology had more impact on the computer industry than on the wheat industry, then the horizontal (computer) intercept would increase more than the vertical (wheat) intercept, and the PPF would become flatter: the opportunity cost of computers would fall, because the technology has made them relatively cheaper (relative to wheat). Going into more detail here is probably beyond the scope of this chapter.
or any combination in between. 86

87. The Shape of the PPF The PPF could be a straight line or bow-shaped
Depends on what happens to opportunity cost as economy shifts resources from one industry to the other.
If opp. cost remains constant, PPF is a straight line.
(In the previous example, opp. cost of a computer was always 10 tons of wheat.)
If opp. cost of a good rises as the economy produces more of the good, PPF is bow-shaped. 87

88. Why the PPF Might Be Bow-Shaped
As the economy shifts resources from beer to mountain bikes:
PPF becomes steeper
opp. cost of mountain bikes increases
Mountain Bikes
Beer 88

89. Why the PPF Might Be Bow-Shaped
At A, opp. cost of mtn bikes is low.
At point A, most workers are producing beer, even those who are better suited to building bikes. So, do not have to give up much beer to get more bikes. A
Beer
Here, we are using “workers” for the more general “resources,” to keep things simple and consistent with the previous examples.
Mountain Bikes 89

90. Why the PPF Might Be Bow-Shaped
At B, most workers are producing bikes. The few left in beer are the best brewers. Producing more bikes would require shifting some of the best brewers away from beer production, causing a big drop in beer output.
At B, opp. cost of mtn bikes is high.
Beer B
Mountain Bikes 90

91. Why the PPF Might Be Bow-Shaped
So, PPF is bow-shaped when different workers have different skills, different opportunity costs of producing one good in terms of the other.
The PPF would also be bow-shaped when there is some other resource, or mix of resources with varying opportunity costs
(E.g., different types of land suited for different uses).
The bow-shaped PPF is more realistic. However, the linear PPF is simpler to work with, and we can learn a lot about how the economy works using the linear PPF. In Chapter 3, we will use a linear PPF to show how trade can make two countries (or two individuals) better off.
Note: In the “Problems and Applications” at the end of the chapter, problem 4 asks students to construct a PPF for an economy with three different workers (Larry, Moe, and Curly), each with a different opportunity cost. The PPF ends up having three line segments (one for each worker), which--very roughly--approximates a bow-shape. After students work through and understand this problem, it should not be hard for them to understand the following: the more different kinds of workers (or, more generally, resources) there are, the closer the PPF will resemble a smooth bow shape. In an actual economy like the U.S., there are millions of different workers with different opportunity costs, so a smooth bow-shaped PPF is a nearly perfect approximation to the actual PPF. 91

92. The PPF: A Summary
The PPF shows all combinations of two goods that an economy can possibly produce, given its resources and technology.
The PPF illustrates the concepts of tradeoff and opportunity cost, efficiency and inefficiency, unemployment, and economic growth.
A bow-shaped PPF illustrates the concept of increasing opportunity cost. 92