1. BY J. A. Sacco

2. A10.00 B9.62 C9.04 D8.06 E6.68 F4.510 G012 2 CombinationM-16 RiflesCD-ROM Players

3. 3 CD-ROM Players (billions of units per year) M-16 Rifles (billions of units per year) 2 4 6 8 10 12 24681012 R Point R is unobtainable. S Point S is inefficient. 0 How is this curve different from the previous curve?

4. 4 CD-ROM Players (billions of units per year) M-16 Rifles (billions of units per year) 2 4 6 8 10 12 24681012 A B C D E F G 0 a b c d e f Opportunity cost in forgone M-16s To obtain: 2 billion additional CD- ROM players Can we explain why the opportunity cost is not constant?

5.  Law of Increasing Relative Costs ◦ As society attempts to produce more of a good, the opportunity cost of additional units generally increases. 5 WHY?

6. ◦ Some resources better suited for certain products. ◦ As you allocate more resources for that good, the production of that good will increase but at a greater cost for the good you are giving up because the resources are used in a less efficient manner. ◦ The specialization of resources influence the shape of the production possibilities curve. ◦ The more specialized the factor of production, the greater the opportunity cost and the curve in the PPC. 6

7.  Economic Growth: How can you increase the production of both M-16s and CD-Roms? ◦ Occurs over a period of time. ◦ Is illustrated by an outward shift of the production possibilities curve. 7

8. 8 CD-ROM Players (billions of units per year) M-16 Rifles (billions of units per year)

9.  The PPC can be used to illustrate the trade- off between present and future consumption.  Consumption Goods- The use of goods and services for personal satisfaction.  Capital Goods- Goods used to produce other goods. 9

10.  Consumer goods ◦ Goods produced for personal satisfaction  Capital goods ◦ Goods use to produce other goods 10 Capital Goods per Year 5 B A 4 Consumption Goods per Year ($ trillions)

11. 11 Recreation per year Food per Year Future growth as a result of A on the left-hand diagram Today Capital Goods per Year 5 B A 4 Consumption Goods per Year ($ trillions)

12. 12 5 B Capital Goods per Year 4 A Recreation per year Today 3 C Consumption Goods per Year ($ trillions) Future growth as a result of C on the left-hand diagram Food per Year

13.  Observations ◦ Forgo consumption goods to produce capital goods ◦ Increase in capital goods stimulates economic growth ◦ In the future the economic system can produce more consumer goods ◦ An increase in capital goods will lead to a higher rate of economic growth in the future 13