1. Unit 1: Basic Economic Concepts 1.3 Production Possibilities Frontier 1

2. REVIEW 1.Explain relationship between scarcity and choices 2.Differentiate between positive & normative 3.Differentiate between price and cost \ 4.Differentiate between consumer and capital goods 5.Differentiate between command economies and free market economies 6.Give examples of each of the 4 Factors of Production 7.Define human capital 8.Define tradeoffs 9.Define opportunity cost 10.Name 10 different teachers at RMHS 2

3. Society has unlimited wants but limited resources Scarcity WE HAVE A PROBLEM!! 3

4. Scarcity Means Governments Must Chooses Between Guns and Butter Governments have to decide how many resources to devote toward the military and how many resources to devote toward consumer goods Classic case of guns versus butter 4

5. "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.” “The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement.” “We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.” -Dwight Eisenhower Speaking against the military build up of the cold war 5

6. The USS Dwight Eisenhower 6 Launched in 1975 and cost $679 million ($4.5 billion in 2007 dollars) 6

7. 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

8. What is the Production Possibilities Curve? A production possibilities curve (or frontier) is a model that shows alternative ways that an economy can use its scarce resources This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 8

9. 4 Key Assumptions of the PPC: Only two goods can be produced Full employment of resources Fixed Resources (Ceteris Paribus)(Ceteris Paribus) Fixed Technology 9

10. ABCDEf 14129500 0246810 Bikes Computers NOW GRAPH IT: Put bikes on y-axis and computers on x-axis Production “Possibilities” Table Each point represents a specific combination of goods that can be produced given full employment of resources. 10

11. Bikes Computers 14 12 10 8 6 4 2 0 0 2 4 6 8 10 A B C D E G Inefficient/ Unemployment Impossible/Unattainable (given current resources) Efficient Production Possibilities How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? 11

12. 2 Bikes 2.The opportunity cost of moving from b to d is… 4.The opportunity cost of moving from f to c is… 3.The opportunity cost of moving from d to b is… 7 Bikes 4 Computer 0 Computers 5.What can you say about point G? Unattainable 1. The opportunity cost of moving from a to b is… Example: Opportunity Cost 12

13. The Production Possibilities Curve (or Frontier) 13

14. Computer Class12345 Economics Class76543 List the Opportunity Cost of moving from –a-b –b-c –c-d –d-e Production Possibilities ABC D E 14

15. Constant Opportunity Cost- Resources are easily adaptable for producing either good. Result is a straight line PPC (not common) Production Possibilities 15

16. PIZZA 20 19 16 10 0 ROBOTS012 34 List the Opportunity Cost of moving from –a-b –b-c –c-d –d-e ABC D E Production Possibilities

17. 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 Production Possibilities

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

19. The Production Possibilities Curve and Efficiency 19

20. 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. Two Types of Efficiency 20

21. Productive and Allocative Efficiency Bikes Computers 14 12 10 8 6 4 2 0 0 2 4 6 8 10 A B C D F E Which points are productively efficient? Which are allocatively efficient? G 21 Productively Efficient combinations are A through D Allocative Efficient combinations depend on the wants of society (What if this represents a country with no electricity?)

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

23. 2008 Audit Exam

25. Shifting the Production Possibilities Curve 25

26. 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 26 Production Possibilities

27. Computers Pizzas What happens if there is an increase in population? 27 Production Possibilities

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

29. Computers Pizzas What if there is a technology improvement in pizza ovens 29 Production Possibilities

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

31. Panama – Favors Consumer Goods Mexico – Favors Capital Goods Consumer goods Capital Goods Current PPC Future PPC Consumer goods Capital Goods Future PPC Current PPC Capital Goods and Future Growth MexicoPanama 31 Countries that produce more capital goods will have more growth in the future.

32. 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 32 Production Possibilities

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

34. New computer making technology Computers Pizzas Question #1 34 A shift only for computers

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

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

37. Destruction of power plants Capital Goods (Guns) Consumer Goods (Butter) Question #4 37 Decrease in resources decrease production possibilities for both

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

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

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