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Choice, Opportunity Costs, and Specialization

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1 Choice, Opportunity Costs, and Specialization
Chapter 2 Choice, Opportunity Costs, and Specialization Economics, 8th Edition Boyes/Melvin

2 Opportunity Cost Opportunity cost: the value of the highest-valued alternative that must be forgone when a choice is made. It is the evaluation of a trade-off. Marginal benefits and costs: the benefits and opportunity costs associated with one additional unit of the good. Copyright © Cengage Learning. All rights reserved.

3 Decision Making Principle: Decision making involves trade-offs.
A trade-off means a sacrifice--giving up one good or activity in order to obtain some other good or activity. Copyright © Cengage Learning. All rights reserved.

4 Production Possibilities Curve
The production possibilities curve shows the maximum quantity of goods and services that can be produced when the existing resources are used fully and efficiently. Copyright © Cengage Learning. All rights reserved.

5 Production Possibilities
Defense Non-defense A1 200 B1 175 75 C1 130 125 D1 70 150 E1 160 F1 25 G1 Only defense goods produced Defense Goods A1 200 G1 Impossible B1 175 150 Efficient Combinations C1 F1 125 Underutilized (Inefficient) 100 Only nondefense goods produced 75 D1 E1 25 50 75 100 125 150 Nondefense Goods Copyright © Cengage Learning. All rights reserved.

6 Growth The PPC moves outward (growth occurs) as the result of:
Increased resources Larger labor force Change in labor force participation Chance in labor-leisure decision Improved technology (innovation) Expansion of capital stock An improvement in the rules (laws, institutions, and policies) of the economy Copyright © Cengage Learning. All rights reserved.

7 A Shift of the PPC Defense Non-defense A2 225 B2 200 75 C2 175 120 D2 130 150 E2 70 160 F2 165 225 A2 Defense Goods A1 B2 200 B1 175 C2 150 C1 D2 125 100 D1 E2 75 E1 F2 25 50 75 100 125 150 Nondefense Goods Copyright © Cengage Learning. All rights reserved.

8 Marginal Cost The Production Possibilities Curve (PPC) illustrates the concept of opportunity cost. Each point on the PPC means that every other point is a forgone opportunity. The PPC bows outward because there are ever-increasing marginal costs to the production of any good. Copyright © Cengage Learning. All rights reserved.

9 Economic Concepts Illustrated using PPC
Copyright © Cengage Learning. All rights reserved. Economic Concepts Illustrated using PPC Opportunity Cost: This is indicated by the negative slope of the PPC. As more of one good is produced, less of the other goods are produced. Full Employment: Producing on the PPC Unemployment: Producing inside the PPC Economic Growth: Indicated by an outward shift of the PPC Investment: Indicated by a trade-off between the production of consumption goods and capital goods.

10 For a business producing shirts and dresses, the opportunity cost of a dress is
The market price that the business can obtain for a dress. The cost of the labor and raw materials used in making the dress The shirts that could have been produced with the resources used to make the dress The total cost of all the resources used to make one dress

11 Copyright © Cengage Learning. All rights reserved.

12 Which of the following will not shift a country’s PPC Outward?
Copyright © Cengage Learning. All rights reserved. Which of the following will not shift a country’s PPC Outward? A reduction in the rate of unemployment An increase in the size of the available labor force An advance in technology An increase in the capital stock

13 Copyright © Cengage Learning. All rights reserved.

14 A decrease in unemployment A decrease in natural resource prices
Copyright © Cengage Learning. All rights reserved. Which of the following would cause an outward-shift of a country’s PPC? A decrease in unemployment A decrease in natural resource prices An increase in consumer demand An increase in immigration Negative net capital investment spending

15 Copyright © Cengage Learning. All rights reserved.

16 In which way does a concave PPC curve differ from a straight-line PPC
Copyright © Cengage Learning. All rights reserved. In which way does a concave PPC curve differ from a straight-line PPC A concave PPC has decreasing opportunity cost. A concave PPC has constant opportunity cost A concave PPC has increasing opportunity cost A concave PPC does not show opportunity cost There is no difference between the two PPC.

17 Copyright © Cengage Learning. All rights reserved.

18 Copyright © Cengage Learning. All rights reserved.

19 Copyright © Cengage Learning. All rights reserved.

20 Specialization Economic agents (individuals, firms, nations) will be better off if they choose to produce those things for which they have the lowest opportunity costs, and trade for those with higher costs. Agents do this because such choices involve giving up the least amount of other things. Copyright © Cengage Learning. All rights reserved.

21 Absolute Advantage Absolute Advantage: the ability of a party (individual, firm, or nation) to produce more number of a good, product, or service than competitors Copyright © Cengage Learning. All rights reserved.

22 Specialization & Trade
Comparative Advantage: the ability to produce a good or service at a lower opportunity cost than someone else. Law of comparative advantage: proposition that the joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer. Copyright © Cengage Learning. All rights reserved.

23 Should Lebron James Mow his own yard?
Copyright © Cengage Learning. All rights reserved. Should Lebron James Mow his own yard? Lebron can mow his lawn in two hours He can also film a Nike commercial in two hours and make $10,000 What is his opportunity cost of mowing his lawn? Scotty the teenager can mow LeBron’s lawn in four hours. He could also work at McDonald’s for four hours at $8 an hour. What is Scotty’s opportunity cost of mowing Lebron’s yard?

24 Should Lebron James Mow his own yard?
Copyright © Cengage Learning. All rights reserved. Should Lebron James Mow his own yard? Who has absolute advantage in mowing the lawn? Who has comparative advantage in mowing the lawn? Would Lebron benefit from the trade? Would Scotty?

25 Optimism and the Economy
How do natural disasters and terrorist attacks affect international trade and economic growth? A report from the World Trade Organization (WTO) says while the immediate effect on particular industries can be notable, the economy-wide impact these events have on trade and growth is short-term and generally minimal. Copyright © Cengage Learning. All rights reserved.

26 Private Property Rights
Private property rights are necessary for a market economy to develop. If no one owns something, no one has the incentive to take care of it. Copyright © Cengage Learning. All rights reserved.

27 Comparative Advantage
Copyright © Cengage Learning. All rights reserved. Comparative Advantage We give up If We Make

28 Copyright © Cengage Learning. All rights reserved.
Chris can bake either 8 pies or 4 loaves of bread per hour. For Chris, what is the opportunity cost of baking an extra pie?

29 What you give up What you gain 4 = 1 8 2 bread
Copyright © Cengage Learning. All rights reserved. What you give up What you gain 4 = 1 bread

30

31

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33 Output Example State Apples Timber Opp. Cost of 1 Timber =
Copyright © Cengage Learning. All rights reserved. Output Example State Apples Timber Opp. Cost of 1 Timber = Opp. Cost of 1 Apple + Oregon 10 40 Washington Absolute Advantage in Timber: Absolute Advantage in Apples: Comparative Advantage in Timber: Comparative Advantage in Apples: Draw these PPF’s. Assume each is producing (and consuming) at the midpoint.

34 Output Example State Apples Timber Opp. Cost of 1 Timber =
Copyright © Cengage Learning. All rights reserved. Output Example State Apples Timber Opp. Cost of 1 Timber = Opp. Cost of 1 Apple = Oregon 10 40 .25 Apple 4 Timber Washington 4 Apple .25 Timber Absolute Advantage in Timber: Oregon Absolute Advantage in Apples: Washington Comparative Advantage in Timber: Oregon Comparative Advantage in Apples: Washington

35 input Example Hours to produce 1 unit of Donuts
Copyright © Cengage Learning. All rights reserved. input Example Hours to produce 1 unit of Donuts Hours to produce 1 unit of Coffee Producing 1 unit of donuts costs Producing 1 unit of coffee costs Springfield 8 4 Shelbyville 24 Absolute Advantage in Donuts: Springfield Absolute Advantage in Coffee: Springfield Comparative Advantage in Donuts : Comparative Advantage in Coffee:

36 input Example Hours to produce 1 unit of Donuts
Copyright © Cengage Learning. All rights reserved. input Example Hours to produce 1 unit of Donuts Hours to produce 1 unit of Coffee Producing 1 unit of donuts costs Producing 1 unit of coffee costs Springfield 8 4 2 units of coffee ½ unit of donuts Shelbyville 24 3 units of coffee 1/3 unit of donuts Absolute Advantage in Donuts: Springfield Absolute Advantage in Coffee: Springfield Comparative Advantage in Donuts : Springfield Comparative Advantage in Coffee: Shelbyville

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