1. Thinking at the Margins Review
Trade-offs vs. Opportunity Costs
Everything has a cost because you could be doing something else with your time, ex. Working, studying, sleeping, watching TV (all have value- TINSTAAFL)
Would you eat 3 burritos?
Even though the total benefit outweighs total cost, most people would not eat the third burrito.
# of Favorite Burritos eaten
Benefit
Cost 1
$12 $6 2 $8 3 $5
Total
$25
$18

2. Circular Flow Model
Households/Individuals provide firms/businesses with the Factors of Production in the Factor Market in exchange for factor payments ($ given in exchange for factors of production, rent, wages, interest)
Firms provide households/individuals with goods and services in the Product Market in exchange for money

3. Production Possibilities Curve
Econ Ch. 1 Sec. 2
Production Possibilities Curve
Goals:
Interpret a Production Possibilities Curve.
Explain how PP curve can show efficiency, growth and cost.
Explain how resources and technology can affect PP curve.

4. Production Possibilities Curve
So… Resources are limited. Every choice has a trade-off and an opportunity cost. A Production Possibilities Curve is a graph that shows alternate ways of using limited resources. Always shows the relationship between two goods or services, either general (farms or factories) or specific (cars or washing machines). We can use the curve to show us the trade-offs and costs.
4 Key Assumptions
Only two goods can be produced
Full employment of resources
Fixed Resources (Ceteris Paribus)
Fixed Technology

5. Monsters Inc and PPC's

6. Production Possibilities Curve
Let’s say a country has 2 industries; Making Shoes and Growing Watermelons.
They take the best farmland in the country and use it to grow watermelons, the rest they use to build shoe factories.
The Production Possibilities for this country would have watermelons and shoes on the two axes of the graph and would show the trade-off between the two goods.

7. Production Possibilities Curve
If the country decides all shoes – no watermelons = pt A
If all watermelons – no shoes = pt F
What else might they decide to do?

8. Production Possibilities Curve
We can use the information in the chart to plot points on the graph showing the relationship between how many shoes and how many watermelons can be produced at the same time.

9. Production Possibilities Curve
Connecting the dots gives us the PPC – also called the frontier
Any point along the line means the country is using its resources in an efficient combination. (using resources in a way that maximizes production)

10. Production Possibilities Curve
Any point inside the curve means that something is getting in the way of maximum production i.e. drought, strike, leather shortage etc.
Underutilization – using fewer resources than an economy is capable of using.

11. Production Possibilities Curve
How many shoes are given up per increase in watermelons?
Does it remain the same?

12. Law of Increasing Costs
As we shift from making one good or service to producing another, the cost will increase more for each extra jump.
Why?
Retraining workers
Remodeling buildings or tearing down for new uses
Land may not be as suitable for new purpose

13. Shape of the Curve Constant vs. Increasing Opportunity Costs
When two items being compared are closely related the curve is closer to being a straight line- the more diverse they are the more bowed out the curve.

14. What causes PPC to Shift?
4 Key Assumptions
Only two goods can be produced
Full employment of resources
Fixed Resources (Ceteris Paribus)
Fixed Technology
Change in Resources (quality or quantity)
Change in Technology

15. Production Possibilities Curve
What if a new machine is created that allows for the shoe factories to make shoes faster?
Or a new genetically altered watermelon seed is developed that produces 2x as many fruit?
How would that affect the curve?
The curve would shift to the right (or up) to show the growth of the industries.

16. Production Possibilities
What happens if there is an increase in population?
Robots
Pizzas

17. Production Possibilities
What happens if there is an increase in population?
Robots
Pizzas 17

18. Production Possibilities
What if there is a technology improvement in pizza ovens
Robots
Pizzas 18

19. Production Possibilities
What if there is a technology improvement in pizza ovens
Robots
Pizzas 19

20. Impact of Capital
If Captial Increases (physical or human)- Overall production for both consumer and capital goods increases
Why?

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

22. New robot making technology
Question #1
New robot making technology Q
A shift only for Robots
Robots Q
Pizzas 22

23. Question #2 Decrease in the demand for pizza Q Robots Q Pizzas
The curve doesn’t shift!
A change in demand doesn’t shift the curve
Robots Q
Pizzas 23

24. Mad cow disease kills 85% of cows A shift inward only for Pizza
Question #3
Mad cow disease kills 85% of cows Q
A shift inward only for Pizza
Robots Q
Pizzas 24

25. Question #4 Power Plants are Destroyed Q Q
Decrease in resources decrease production possibilities for both
Capital Goods (manufacturing) Q
Consumer Goods (Clothing)

26. Question #5 Faster computer hardware Q Q
Quality of a resource improves shifting the curve outward
Capital Goods (manufacturing) Q
Consumer Goods (Clothing) 26

27. Question #6 Many workers unemployed Q Q The curve doesn’t shift!
Unemployment is just a point inside the curve Q
Consumer Goods (Clothing) 27

28. Question #7 Significant increases in education Q Q
The quality of labor is improved. Curve shifts outward. Q
Consumer Goods (Clothing) 28

29. Goal Check Interpret a Production Possibilities Curve.
Explain how a PPC can show efficiency, growth and costs.
Explain how resources and technology can affect a PPC.