1. Chapter 01 Economics: The Study of Opportunity Cost
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2. Chapter Outline Economics And Opportunity Cost
Modeling Opportunity Cost Using A Production Possibilities Frontier
Attributes Of The Production Possibilities Frontier
The Big Picture
Thinking Economically
Kick It Up A Notch: Demonstrating Constant And Increasing Opportunity Cost on a Production Possibilities Frontier
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3. Economics and Opportunity Cost
Economics: the study of the allocation and use of scarce resources to satisfy unlimited human wants
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4. Choices Have Consequences
Opportunity Cost
The forgone alternative of the choice made Or
What you would have done had you not done what you did.
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5. Modeling Opportunity Cost Using a Production Possibilities Frontier Definitions
PPF: a graph which relates the amounts of different goods that can be produced in a fully employed society
Model: a simplification of the real world that we can manipulate to explain the real world
Simplifying Assumption: an assumption that may, on its face, be silly but allows for a clearer explanation
Scarce: not freely available and infinite
Resources: anything we either consume directly or use to make things that we will ultimately consume
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6. Figures 1-4 Building The Production Possibilities Frontier
Soda S X Y M Z P
Pizza
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7. A Fully Labeled Production Possibilities Frontier: The Case When People are Different
Soda
Pizza X Y Z M
Unattainable
Attainable
Unemployment
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8. Figure 5 Soda Pizza Unattainable Unemployment Attainable
(outside the curve)
Unemployment
(just inside the curve)
Attainable
(on the curve and on the inside)
Pizza
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9. A Fully Labeled Production Possibilities Frontier: The Case When People are the Same
Soda
Pizza S
Unattainable X
Attainable Y M Z
Unemployment P
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10. Figure 6 Soda Pizza Unattainable Unemployment Attainable
(outside the curve)
Unemployment
(just inside the curve)
Attainable
(on the curve and on the inside)
Pizza
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11. Increasing and Constant Opportunity Cost
Increasing Opportunity Cost
Exists when the additional resources required to produce an additional unit grows as more output is produced.
Likely to occur when people are different in their skills.
Constant Opportunity Cost
Exists when the additional resources required to produce an additional unit remains the same as more output is produced.
Likely to occur when people are identical in their skills.
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12. The Big Picture
circular flow model: A model that shows the interactions of all economic actors
Markets are where the interactions take place
Actors are the entities interacting
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13. Markets in a Circular Flow Diagram
Market: Any mechanism by which buyers and sellers negotiate an exchange
Factor Market: A mechanism by which buyers and sellers of labor and financial capital negotiate an exchange.
Goods and Services Market: A mechanism by which buyers and sellers of goods and services negotiate an exchange.
Foreign Exchange Market: A mechanism by which buyers and sellers of the currencies of various countries negotiate an exchange.
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14. Actors in a Circular Flow Diagram
Households
Firms
Government
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15. The Circular Flow Diagram
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16. Thinking Economically: Marginal Analysis
Optimization Assumption: an assumption that suggests that the person in question is trying to maximize some objective
Marginal Benefit: the increase in the benefit that results from an action
Marginal Cost: the increase in the cost that results from an action
Net Benefit: the difference between all benefits and all costs
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17. Positive and Normative Analysis
Positive Analysis: a form of analysis that seeks to understand the way things are and why they are that way
Normative Analysis: a form of analysis that seeks to understand the ways things should be
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18. Economics Incentives
Incentive: something that influences the decisions we make
Examples: prices influence the amount we buy; taxes influence how much we work and save
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19. Logical Flaws
Fallacy of Composition: the mistake in logic that suggests that the total economic impact of something is always and simply equal to the sum of the individual parts
Correlation = Causation: the mistake that suggests that because two variables are correlated that one caused the other to happen.
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20. Demonstrating Increasing and Constant Opportunity Cost
Kick it Up a Notch
Demonstrating Increasing and Constant Opportunity Cost
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21. Figure 7 Illustrating Increasing Opportunity Cost
Production Possibilities Frontier
Pizza
Soda
Opportunity Cost of going from 0 units of
Pizza to 1 unit of pizza
Opportunity Cost of going from 1 unit of
Pizza to 2 units of pizza
Opportunity Cost of going from 2
units of Pizza to 3 units of pizza
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22. Figure 8 Illustrating Constant Opportunity Cost
Opportunity Cost of going from 0 units of
Pizza to 1 unit of pizza
Production Possibilities Frontier
Pizza
Soda
Opportunity Cost of going from 1 unit of
Pizza to 2 units of pizza
Opportunity Cost of going from 2
units of Pizza to 3 units of pizza
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