1. Unit 1: Basic Economic Concepts

2. Draw Production Possibilities Graph for the Ford Motor Co
Draw Production Possibilities Graph for the Ford Motor Co. using the following information, Make cars the Y-axis and Trucks the X-axis: A B C D E F G
Cars 10 18 25 30 33 35
Trucks 45 42 39 15

3. The Economizing Problem…
WE HAVE A PROBLEM!!
The Economizing Problem…
Scarcity
Society has unlimited wants but unlimited resources

4. Business Cycle Depression- Deep prolonged downturn Recessions-
Periods in which output and employment are falling
Employment-
Total number of people currently working
Unemployment-
Total number of people looking for work
Rate- Percentage of labor force that is unemployed
STRONGETS INDICATOR of the job market

5. Unemployment cont.…
Output-
Quantity of goods and services produced
Moves in opposite direction as unemployment
Labor Force= Employed + Unemployed
Aggregate Output
Total production over a given time period

6. Inflation v. Deflation Inflation- Rise in the overall price level
(Decrease in value of dollar) people get rid of
Deflation-
fall in the overall price level
(Increase in value of dollar)
Economic Goal
Price Stability- Little to no change in prices

7. Economic Growth/Models
Increase in output
Fundamental in prosperity
Models-
allows economists to study changes

8. The Production Possibilities Curve (PPC) Using Economic Models…
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph

9. The Production Possibilities Curve
All models have simplifying assumptions:
Available supply of resources is fixed in quantity and quality at this point in time.
Technology is constant during analysis.
Economy produces only two types of products.

10. Opportunity Cost - Constant
A PPC with a straight line has a constant slope, and therefore, constant opportunity cost.

11. Opportunity Cost - Increasing
Question for Students:
If we want more bulldozers, and if we were controlling this economy, what would we need to do?
We would need to move some pizza makers (and capital, and natural resources) to bulldozer production.
Has anyone ever had a bad pizza or a great pizza? Is it safe to say that not all pizzas are created equal? Then is it also safe to say that not all pizza makers (the labor) are created equal?
Are some pro athletes better than others?
Are some acres of land more fertile (for growing food) than others?
Are all laptop computers equal, or are some faster than others?
The point is that resources are not created equal. Can the students agree that some units of labor are better pizza makers than others? If that’s the case, then let’s redraw the PPC.
Redraw the PPC with a concave shape. You don’t need numbers.
There is something that economists call the “Law of increasing opportunity costs”
1. The amount of other products that must be foregone to obtain more of any given product is called the opportunity cost.
2. The more of a product produced the greater is its (marginal) opportunity cost.
3. The slope of the production possibilities curve becomes steeper (going left to right), demonstrating increasing opportunity cost. This makes the curve appear bowed out, concave from the origin.
Why?
1. Economic recourses are not completely adaptable to alternative uses.
2. To get increasing amounts of Bulldozers, resources that are not particularly well suited for that purpose must be used. Workers that are accustomed to producing Pizza in a restaurant may not do well as heavy equipment builders.
A pizza oven is a piece of capital equipment that is not very adaptable to building Bulldozers.

12. Economic Growth Economic growth
Expansion of the economy’s production possibilities
Availability of resources (land, labor, capital, entrepreneurship)
Technology
Economic growth means an expansion of the economy’s production possibilities: the economy can produce more of everything.

13. Economic Growth
Draw a new PPC that has shifted outward in a roughly parallel manner. How could this happen?
When factors of production expand in quantity or quality. A bigger or a more educated/skilled work force.
When technological advances are occurring. Technology always advances, we don’t forget our technology.

14. Production “Possibilities” Tablef 14 12 9 5 2 4 6 8 10
Bikes
Computers
Each point represents a specific combination of goods that can be produced given full employment of resources.
NOW GRAPH IT: Put bikes on y-axis and computers on x-axis

15. Production Possibilities
How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? 14 12 10 8 6 4 2
Impossible/Unattainable
(given current resources) A B G C
Bikes
Efficient D
Inefficient/ Unemployment E
Computers

16. Opportunity Cost Example:
1. The opportunity cost of moving from a to b is…
2 Bikes
2.The opportunity cost of moving from b to d is…
7 Bikes
3.The opportunity cost of moving from d to b is…
4 Computer
4.The opportunity cost of moving from f to c is…
0 Computers
5.What can you say about point G?
Unattainable

17. The Production Possibilities Curve (or Frontier)

18. Production Possibilities
A B C D E
CALZONES
PIZZA
List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
Constant Opportunity Cost- Resources are easily adaptable for producing either good.
Result is a straight line PPC (not common)

19. Production Possibilities
A B C D E
PIZZA
ROBOTS
List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
Law of Increasing Opportunity Cost-
As you produce more of any good, the opportunity cost (forgone production of another good) will increase.
Why? Resources are NOT easily adaptable to producing both goods.
Result is a bowed out (Concave) PPC

20. Constant vs. Increasing Opportunity Cost
Identify which product would have a straight line PPC and which would be bowed out?
Corn
Cactus
Wheat
Pineapples

21. PER UNIT Opportunity Cost How much each marginal unit costs
Units Gained
Example:
1. The PER UNIT opportunity cost of moving from a to b is…
1 Bike
2.The PER UNIT opportunity cost of moving from b to c is…
1.5 (3/2) Bikes
3.The PER UNIT opportunity cost of moving from c to d is…
2 Bikes
4.The PER UNIT opportunity cost of moving from d to e is…
2.5 (5/2) Bikes
NOTICE: Increasing Opportunity Costs

22. The Production Possibilities Curve and Efficiency

23. Two Types of Efficiency
Productive Efficiency-
Products are being produced in the least costly way.
This is any point ON the Production Possibilities Curve
Allocative Efficiency-
The products being produced are the ones most desired by society.
This optimal point on the PPC depends on the desires of society. 23

24. Productive and Allocative Efficiency
Which points are productively efficient?
Which are allocatively efficient? 14 12 10 8 6 4 2
Productively Efficient combinations are A through D A B G
Allocative Efficient combinations depend on the wants of society
(What if this represents a country with no electricity?)
Bikes C E F D
Computers 24

25. Why two types of efficiency? Is combination “A” efficient?
Yes and No. It is productively efficient but it is not the combination society wants
Size 20 running shoes A
Size 10 running shoes

26. Shifting the Production Possibilities Curve

27. 3 Shifters of the PPC Production Possibilities
4 Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
Fixed Resources (4 Factors)
Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade

28. Production Possibilities
What happens if there is an increase in population?
Robots
Pizzas

29. Production Possibilities
What happens if there is an increase in population?
Robots
Pizzas 29

30. Production Possibilities
What if there is a technology improvement in pizza ovens
Robots
Pizzas 30

31. Production Possibilities
What if there is a technology improvement in pizza ovens
Robots
Pizzas 31

32. Capital Goods and Future Growth
Countries that produce more capital goods will have more growth in the future.
Panama – Favors Consumer Goods
Mexico – Favors Capital Goods
Current
PPC
Future
PPC
Future
PPC
Capital Goods
Current
PPC
Capital Goods
Consumer goods
Consumer goods
Panama
Mexico

33. PPC Practice Draw a PPC showing changes for each of the following:
Pizza and Robots (3)
1. New robot making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
4. Destruction of power plants leads to severe electricity shortage
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education

34. New robot making technology
Question #1
New robot making technology Q
A shift only for Robots
Robots Q
Pizzas 34

35. Question #2 Decrease in the demand for pizza Q
The curve doesn’t shift!
A change in demand doesn’t shift the curve
Robots Q
Pizzas 35

36. Mad cow disease kills 85% of cows A shift inward only for Pizza
Question #3
Mad cow disease kills 85% of cows Q
A shift inward only for Pizza
Robots Q
Pizzas 36

37. Question #4 BP Oil Spill in the Gulf Q
Decrease in resources decrease production possibilities for both
Capital Goods (Guns) Q
Consumer Goods (Butter) 37

38. Question #5 Faster computer hardware Q
Quality of a resource improves shifting the curve outward
Capital Goods (Guns) Q
Consumer Goods (Butter) 38

39. Question #6 Many workers unemployed Q The curve doesn’t shift!
Unemployment is just a point inside the curve
Capital Goods (Guns) Q
Consumer Goods (Butter) 39

40. Question #7 Significant increases in education Q
The quality of labor is improved. Curve shifts outward.
Capital Goods (Guns) Q
Consumer Goods (Butter) 40