Unit 1 Basic Economic Concepts 1 Quick Economic

Unit 1: Basic Economic Concepts 1

Quick Economic Concepts Review 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. What is Scarcity? What is Shortage? What is Specialization? What is Marginal Utility? What is Allocative Efficiency? What is the Difference b/w Price & Cost? What is Investment? Differentiate b/w Positive & Normative Give the Equation for Profit Differentiate b/w Consumer & Capital Goods Examples of Each of the 4 Factors of Production Define Opportunity Cost Differentiate b/w Accounting & Economic Costs Name 10 Teachers/Faculty At 32 nd STEAM 2

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

The Production Possibilities Curve/Frontier/Graph 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 4

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 Technology 5

Production Possibilities A B C D E 4 3 2 1 0 Calzones 0 1 2 3 4 Pizzas Robots 20 A C 2 0 1 2 3 4 D 4 E 1 20 19 16 10 8 D 1 E C 12 B 2 D 0 C B 16 A 3 0 4 Pizzas B Pizzas 4 A 3 Calzones E 0 1 2 3 4 Robots

Production Possibilities A Pizzas 4 Calzones 0 B 3 1 C 2 2 D 1 3 • List the Opportunity Cost of moving from a-b, b-c, c-d, Pizzas and d-e. • Constant Opportunity Cost: A Resources are easily B adaptable for producing either good. • Result is a straight line PPC (not common) E 0 4 C D E Calzones 7

Production Possibilities Pizzas Robots A 20 0 B 19 1 C 16 2 D 10 3 E 0 4 Pizzas • List the Opportunity Cost of moving from a-b, b-c, c-d, & d-e. • Law of Increasing Opportunity Cost: Ø As you produce more of any good, the opportunity cost will increase. Ø Why? Resources are NOT easily adaptable to producing both goods. • Result is a Concave (bowed out) Production Possibilities Curve. A B C D E Robots

Production “Possibilities” Table Bike Computer A B C D E 14 0 12 2 9 4 5 6 0 8 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 & computers on x-axis 9

Production Possibilities How does the PPC graphically demonstrates scarcity, trade-offs, opportunity costs, & efficiency? Impossible/Unattainable (given current resources) Bikes 14 A A Bikes Computers E 12 14 12 9 5 0 10 0 B 2 C D 4 6 8 G B C 8 6 Efficient A E D 4 Inefficient 2 Unemployment 0 2 4 E 6 8 Computers

Opportunity Cost 1. The opportunity cost of moving from A to B is… Bikes 2. The opportunity cost of 14 A moving from B to D is… B 7 Bikes 12 G 3. The opportunity cost of 10 C moving from D to B is… 8 4 Computers 4. The opportunity cost of 6 D F moving from F to C is… 4 0 Computers 2 E 5. What can you say about 0 2 4 6 8 Computers point G? Unattainable 11

PER UNIT Opportunity Cost How much each marginal unit costs Opportunity Cost Units Gained 1. The PER UNIT opportunity cost of moving from A to B is… 1 Bike 14 A 2. The PER UNIT opportunity cost B 12 of moving from B to C is… 10 1. 5 (3/2) Bikes C 3. The PER UNIT opportunity cost 8 of moving from C to D is… 6 D 2 Bikes 4 4. The PER UNIT opportunity cost 2 of moving from D to E is… E 2. 5 (5/2) Bikes 0 2 4 6 8 Computers Bikes NOTICE: Increasing Opportunity Costs

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

The Production Possibilities Curve & Efficiency 14

Two Types of Efficiency 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. 15

Productive and Allocative Efficiency Which points are productively efficient? Which are allocatively efficient? ØProductively Efficient combinations are the curve A through E ØAllocative Efficient combinations depend on the wants of society What if this represents a country with no electricity? 16

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

Shifting the Production Possibilities Curve 18

Production Possibilities Curve Ø Ø 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 2. Change in Technology 3. Change in Trade 19

Robots Production Possibilities What happens if there is an increase in population? G Pizzas 20

Robots Production Possibilities What if there is a technology improvement in pizza ovens Pizzas 21

PPC Practice Draw a PPC showing changes for each of the following: Robots 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 Pizzas 22

Question #1 New robot making technology Q Robots A shift only for Robots Pizzas Q 23

Question #2 Decrease in the demand for pizza Robots Q The curve doesn’t shift! A change in demand doesn’t shift the curve Pizzas Q 24

Question #3 Mad cow disease kills 85% of cows Robots Q A shift inward only for Pizzas Q 25

Q Capital Goods (Guns) Question #4 Destruction of power plants leads to severe electricity shortage Decrease in resources decrease production possibilities for both Consumer Goods (Butter) Q 26

Question #5 Faster computer hardware Capital Goods (Guns) Q Quality of a resource improves shifting the curve outward Consumer Goods (Butter) Q 27

Question #6 Many workers unemployed Capital Goods (Guns) Q The curve doesn’t shift! Unemployment is just a point inside the curve Consumer Goods (Butter) Q 28

Question #7 Significant increases in education Capital Goods (Guns) Q The quality of labor is improved. Curve shifts outward. Consumer Goods (Butter) Q 29

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 Future PPC Consumer goods Panama Future PPC Capital Goods Current PPC Consumer goods Mexico 30