1. Basic Economic Concepts
Unit One:
Basic Economic Concepts

2. I. Production Possibilities Model
Assumptions when using PPC model:
Available supply of resources is fixed in quantity at the point in time.
Technology is constant during analysis.
Economy produces only two types of products.
Draw PPC on the board to represent this table.
Pizzas
Bulldozers 50 25

3. A. Efficiency
A) Points on the curve represent maximum possible combinations with given resources and technology.
B) Points inside represent underemployment or idle resources.
C) Points on the curve are unattainable.
A point on the frontier (all points along the curve are efficient in production.)
Efficient allocation does not equal efficient in production
To be efficient in allocation, production must represent the values of that society.
Therefore, if they want to produce more pizza than bulldozers, then a point closer to bulldozers on the frontier would be efficient in production but not in allocation.
B point inside the frontier
C point outside the frontier

4. B. Opportunity Cost
The opportunity cost of the good graphed on the x-axis is always the slope of the PPC
The opportunity cost of the good on the y-axis is always the inverse of the slope of the PPC
Law of Increasing Opportunity Costs: As production increases, the opportunity cost does as well.
M = y(2) – y(1)/ x(2) – x(1)= the slope
The inverse is multiplied by -1
Change in good Y production/ Change in good X production = opportunity cost
It doesn’t matter what the initial point on the PPC is, the opportunity cost will always be the same.
Notice that the slop is constant (including the opportunity cost) This means that the items are perfectly substitutable. Does this make sense?
It is expensive to start production, since you must gather capital; therefore it may cost more initially and lower in cost at some point.
The curve will typically appear curved where production is lower initially.
Pizza producers are not skilled at building bulldozers. At first the worst pizza makers will shift over, so the impact on pizza production is not very high, but as you pull over more resources to bulldozing you pull over better human and physical capital which makes it more costly and thus concave.

5. B. Opportunity Cost Pizzas (x) Bulldozers (y) 200 160 20 120 40 80 60
160 20
120 40 80 60
100

6. C. Economic Growth
Economic Growth: an expansion of the economy’s production possibilities
Occurs when factors of production increase:
In quantity (more workers, more tools)
In quality (better workers, better tools)
Economic growth: the economy can produce more of everything.
Example with corn and cars:
PPC: Identify, efficient, inefficient, and unattainable; say that the society values corn over cars which point would be efficient in allocation
We develop better fertilizer, expands the PPC by corn.

7. D. Comparative Advantage
Comparative Advantage: a nation can produce the good with a lower opportunity cost.
Results in trade between nations
David Ricardo developed the idea of comparative advantage because of England’s Corn Laws, which were instated to protect domestic corn farmers.
Mutually advantageous
Draw PPC for another nation where clearly one can make more of one product and the other country can make more of the other.
The Cuban representative gave Kramer a cigar because he had a comparative advantage; it takes less for him to get the cigar and he had plenty; Kramer accepted the cigar and gave his jacket because he has others and really needed a cigar.