Post on 24-Dec-2015
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Unit 1: Basic Economic Concepts
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Quick ReviewBasic Economic Concepts
1. What is Scarcity? What is Shortage? 2. What is Specialization? 3. What is Marginal Utility? 4. What is Allocative Efficiency? 5. What is the Difference b/w Price & Cost? 6. What is Investment? 7. Differentiate b/w Positive & Normative8. Give the Equation for Profit9. Differentiate b/w Consumer & Capital Goods10. Examples of Each of the 4 Factors of Production11. Define Opportunity Cost12. Differentiate b/w Accounting & Economic Costs13. Name 10 Teachers/Faculty At 32nd STEAM
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Society has unlimited wants but limited resources
The Economizing Problem…Scarcity
WE HAVE A PROBLEM!!
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The Production Possibilities Curve/Frontier/Graph
Using Economic Models…
Step 1: Explain concept in wordsStep 2: Use numbers as examplesStep 3: Generate graphs from numbersStep 4: Make generalizations using graph
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What is the Production Possibilities Curve?
• A production possibilities curve (PPC) 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.
4 Key Assumptions• Only 2 Goods Can Be Produced • Full Employment of Resources• Fixed Resources• Fixed Technology
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2
0
1
6
1
2
8
4
A B C D E
Pizzas 20 19
16
10
0
Robots
0 1 2 3 4
A B C D E
Pizzas 4 3 2 1 0
Calzones
0 1 2 3 4
0 1 2 3 4
Pizzas
Calzones
4
3
2
1
Pizzas
Robots
A
D
B
E
C
0 1 2 3 4
A
D
B
E
C
Production Possibilities
• 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)
Production Possibilities
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A B C D E
Pizzas 4 3 2 1 0
Calzones
0 1 2 3 4
Pizzas
Calzones
A
D
B
E
C
• List the Opportunity Cost of moving from a-b, b-c, c-d, & d-e.
• Law of Increasing Opportunity Cost:
As you produce more of any good, the opportunity cost will increase.
Why? Resources are NOT easily adaptable to producing both goods.
• Result is a Concave (bowed out) Production Possibilities Curve.
Production PossibilitiesA B C D E
Pizzas 20 19 16 10 0
Robots 0 1 2 3 4
Pizzas
Robots
A
D
B
E
C
NOW GRAPH IT: Put bikes on y-axis & computers on x-
axis
Production “Possibilities” Table
Each point represents a specific combination of goods that can be produced given full employment of resources.
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A B C D E
Bike 14 12 9 5 0Comput
er0 2 4 6 8
Production PossibilitiesHow does the PPC graphically demonstrates
scarcity, trade-offs, opportunity costs, & efficiency?
A B C D E
Bikes 14
12
9 5 0
Computers
0 2 4 6 8
Computers
Bikes
Efficient
AE
Inefficient Unemployme
nt
Impossible/Unattainable (given current resources)
A
B
C
D
E
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12
10
8
6
4
2
0
2 4 6 8
G
1. The opportunity cost of moving from A to B is…
2. The opportunity cost of moving from B to D is…
3. The opportunity cost of moving from D to B is…
4. The opportunity cost of moving from F to C is…
5. What can you say about point G?
2 Bikes
7 Bikes
4 Computers
0 Computers
Unattainable
Opportunity Cost
11Computers
Bikes
A
B
C
D
E
14
12
10
8
6
4
2
0
2 4 6 8
G
Computers
Bikes
A
B
C
D
E
14
12
10
8
6
4
2
0
2 4 6 8
1. The PER UNIT opportunity cost of moving from A to B is…
2. The PER UNIT opportunity cost of moving from B to C is…
3. The PER UNIT opportunity cost of moving from C to D is…
4. The PER UNIT opportunity cost of moving from D to E is…
1 Bike
1.5 (3/2) Bikes
2 Bikes
2.5 (5/2) Bikes
PER UNIT Opportunity CostHow much each
marginal unit costs
NOTICE: Increasing Opportunity Costs
Opportunity Cost
Units Gained
Constant vs. Increasing Opportunity Cost
Corn
Wheat
Cactus
Watermelon
Identify which product would have a straight line PPC and which would be bowed out?
The Production Possibilities Curve &
Efficiency
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Two Types of Efficiency
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Productive
Efficiency
Allocative
Efficiency
Products are being produced in the least costly way. This is any point ON the Production Possibilities Curve
The products being produced are the ones most desired by society.
This optimal point on the PPC depends on the desires of society.
Productive and Allocative EfficiencyWhich points are productively efficient?Which are allocatively efficient?
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Productively Efficient combinations are the curve A through E
Allocative Efficient combinations depend on the wants of society
What if this represents a country with no electricity?
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
Shifting the Production Possibilities Curve
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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 PPC1. Change in Resource2. Change in Technology3. Change in Trade
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Production Possibilities Curve
Ro
bo
ts
Pizzas20
Production PossibilitiesWhat happens if there is an increase in population?
Ro
bo
ts
Pizzas
Ro
bo
ts
Pizzas
What if there is a technology improvement in pizza ovens
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Production Possibilities
Ro
bo
ts
Pizzas
PPC PracticeDraw a PPC showing changes for each of the following:
Pizza and Robots (3)1. New robot making technology2. 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 hardware6. Many workers unemployed7. Significant increases in education
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Robots
Pizzas
New robot making technologyQ
Q
Ro
bo
ts
Pizzas
Question #1
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A shift only for Robots
Decrease in the demand for pizzaQ
Q
Ro
bo
ts
Pizzas
Question #2
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The curve doesn’t shift!A change in demand
doesn’t shift the curve
Mad cow disease kills 85% of cowsQ
Q
Ro
bo
ts
Pizzas
Question #3
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A shift inward only for Pizza
Destruction of power plants leads to severe electricity shortage
Q
QCap
ital
Go
od
s (G
un
s)
Consumer Goods (Butter)
Question #4
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Decrease in resources decrease production
possibilities for both
Faster computer hardwareQ
Q
Cap
ital
Go
od
s (G
un
s)
Consumer Goods (Butter)
Question #5
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Quality of a resource improves shifting the
curve outward
Many workers unemployedQ
Q
Cap
ital
Go
od
s (G
un
s)
Consumer Goods (Butter)
Question #6
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The curve doesn’t shift!Unemployment is just a point inside the curve
Significant increases in educationQ
Q
Cap
ital
Go
od
s (G
un
s)
Consumer Goods (Butter)
Question #7
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The quality of labor is improved. Curve shifts
outward.
Panama – Favors Consumer Goods
Mexico – Favors Capital Goods
Consumer goods
Cap
ital
Goo
ds
Current PPC
Future PPC
Consumer goods
Cap
ital
Goo
ds
Future PPC
Current PPC
Capital Goods and Future Growth
MexicoPanama30
Countries that produce more capital goods will have more growth in the future.