1. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Trade-Offs Scarcity implies trade-offs TANSTAAFL What determines our trade-offs? 2-1

2. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Opportunity Costs Definition: Value of resources in their best alternative use Examples  Going to a movie  Studying  Cash under pillow  Home canning  Wood chopping 2-2

3. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. The Economics of Star Trek 2-3

4. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Changing Opportunity Costs and Star Trek PhasersSalt Shakers A015 B114 C212 D3 9 E4 5 F5 0 2-4

5. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Graph of Star Trek Possibilities 2-5

6. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-6 Production Possibilities Curve A production possibilities curve illustrates opportunity cost by showing trade-offs among choices. It shows the MAXIMUM number of outputs that can be achieved from a GIVEN AMOUNT of inputs.

7. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-7 6 A Production Possibilities Curve for an Individual Economics grade 100 88 70 46 40 5866789498 History grade E: 20 hours of history, 0 hours of economics E D C B A: 20 hours of economics, 0 hours of history A Hours of study in history Grade in history Hours of study in economics Grade in economics 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 98 96 94 92 90 88 86 84 82 80 78 76 74 72 70 68 66 64 62 60 58 0 1 2 3 4 5 7 8 9 10 11 12 13 14 15 16 17 18 19 20 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100

8. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-8 Increasing Marginal Opportunity Cost Butter Slope is flat at A. Low opportunity cost of guns. Slope is steep at B. High opportunity cost of guns. Guns B A The principle of increasing marginal opportunity cost states that opportunity costs increase as you produce more of one product.

9. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-9 A Production Possibilities Table for Society % of resources devoted to production of guns Number of guns % of resources devoted to production of butter Pounds of butterRow 0 20 40 60 80 100 0 4 7 9 11 12 100 80 60 40 20 0 15 14 12 9 5 0 A B C D E F

10. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-10 PPC for Society 1211 A Butter Guns 479 0 1 gun 5 pounds of butter 5 9 15 3 guns 2 pounds of butter B C D E F 14 12 4 guns 1 pound of butter

11. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-11 Efficiency and Inefficiency Guns 10 8 6 4 2 0 2 4 6810 Butter CD A B Efficient points Inefficient point Unattainable point

12. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 2-12 Shifts in the PPC Neutral Technological Change Butter A Guns 0 Biased Technological Change 0 B Butter Guns C B D C A