1. Opportunity Cost and Production Possibilities
E.2, E.8

2. Objectives Students will…
Describe why every decision involves trade-offs
Explain the concept of opportunity cost
Interpret a production possibilities curve
Demonstrate how production possibilities curves show efficiency, growth and cost.

3. Warm-Up In your group, come up with 5 vacation destinations.
Wait for further instructions…

4. Why?
Why did you choose that specific one?
What was discussed?

5. Trade-offs Everyone makes trade-offs Individual Businesses Society
All the alternatives that are given up whenever we choose one course of action over another.
Individual
Clean your room or play a game
Wear short sleeves, wear long sleeves
Sport or Academic club
Businesses
How to use land, labor, capital
Society
Guns or butter – a country that decides to produce more military goods has fewer resources to devote to consumer goods and vice versa.

6. How do you think trade-offs get translated into economic and government policies?

7. Opportunity Cost
The most desirable alternative given up as the result of a decision is called the opportunity cost.
Examples:
Family buys a computer or goes on trip
Gov’t producing more “guns” has less “butter”
Sleep late or wake up early to eat breakfast?
Sleep late or wake up early to study for a test?
Decision depends on the specific opportunity cost – what you are willing to sacrifice. n

8. Thinking at the Margin
Thinking at the margin is an additional characteristic of opportunity cost.
Many decisions involve adding one unit or subtracting one unit (like a minute or a dollar)
When you decide how much more or less to do, you are thinking at the margin.
Extra study time example

9. Production Possibilities Intro

10. Production Possibilities Curve
Economists often use graphs to analyze the choices and trade-offs that people make.
Production Possibilities Curve – shows alternative ways to use an economy’s productive resources.
Castaway example

11. Chuck’s Resources Land Labor Capital sand, water, fish, coconut trees
himself (energy)
Capital
ice skate, deflated lifeboat, video tape, Wilson (of course)
p. 16 in AP Econ book

12. PPF Crucial distinction between points inside, outside, or on the PPC
PPC represents feasibility and efficiency  show maximum possible output and production.
Feasibility – possible, it can happen; something can be produced with the resources given
Efficient – using resources in such a way as to maximize the production of goods and services

13. Distinction of Points Inside: Feasible but not efficient
On the curve: feasible and efficient (best possible outcome)
Outside: Not feasible.

14. Let’s do another one…

15. Growth
PPC reflects the country’s current production possibilities if the country’s resources were frozen in time…
BUT… they’re constantly changing
If the quantity or quality of available land, labor, or capital changes, then the curve will move.
More labor = more production = maximum amount of goods possible to produce increases
New inventions can allow workers to produce more goods at lower costs
Look at the graph again. With all of this information in mind, which way do you think the curve will shift?

16. RIGHT!!
What about when a country’s production capacity decreases? Which way will the curve shift?

17. Cost Cost is not necessarily money.
Cost is the alternative we give up when we choose one option over the other.
Opportunity COST – we can use PPC to see the OC involved in a decision

18. Your turn…

19. Opportunity Cost and Production Possibilities
E.2, E.8

20. Part II Quick review: What are trade-offs? What is opportunity cost?
What is thinking at the margin?
What does the PPF show/illustrate?

21. Where are the points of efficiency?
Where are the points of inefficiency?
Which point(s) are not feasible?

22. Growth Which way will the PPF shift to show growth?
Decrease in growth?
What causes the curve to shift?