Homework:
- Answer Chapter 1 Discussion
Questions 9 & 10.
- Answer AP Review Questions 6 & 7.
- Do Problems #1, 2, 5, 6, & 7 on pages
22 & 23.
Questions from last Thursday’s problem
sets?
Chapter 1 Review
The Economizing Problem
Society’s wants are unlimited.
Economic resources are scarce.
Resource Categories
• Land (land and natural resources)
• Capital: all manufactured goods used in
producing consumer goods and services.
– NOT money, that’s how it’s used in finance.
• Labor
• Entrepreneurial Ability
Resources
• Resources are also known as the
FACTORS OF PRODUCTION.
- Your book will refer to “resource
markets” where these resources are
bought and sold, and that’s fine, but
AP generally uses the term “factor
markets.”
The Economizing Problem
• Using scarce resources to satisfy the maximum
amount of wants. To get there, an economy
must attain:
• Full Employment: full use of all available
resources (not just labor).
• Full Production: Most efficient use of our
resources.
– Productive efficiency: the production of goods
and services in the least costly way.
– Allocative efficiency (optimal allocation):
producing the particular mix of goods and
services that society most wants.
Production Possibilities Tables,
Curves, Frontiers.
The Production Possibilities Curve
• Is Downward Sloping.
–Why?
The Production Possibilities Curve
• Is Bowed Out (or concave) to the
axis.
–Why?
The Production Possibilities Curve
Rice
• It’s Bowed Out due to the law of
increasing opportunity costs.
Wheat
A production possibilities curve for security and all other goods
and services. What is the opportunity cost of increasing security
from SA to SB ?
Answer: OA - OB
The Production Possibilities Curve
• You will see some PPCs that are
straight, rather than bowed out.
–What does
that tell us?
–Why use a
straight PPC?
– Review: tell
me about
these points:
X, W, A-E.
Allocative Efficiency (optimal
allocation)
• What combination of goods and
services is most wanted by society?
• Requires that the production or
consumption of a good be increased
until its marginal benefit = marginal
cost.
Unemployment and Productive
Inefficiency
• Both will cause an economy to produce goods
at some point inside of its PPC.
Economic Growth
• Will cause a PPC to shift outwards.
1. Assume that Patelland produces only socks
and shoes, and that its available resources are
not completely adaptable to both purposes.
a. Sketch a correctly labeled PPC for
Patelland. (2 pts.)
b. Draw and label a point on the PPC that
shows Patelland experiencing unemployment.
(1 pt.)
c. Draw a new curve on your PPC that
shows the effect of an increase in land suitable
for growing cotton and improvements in leather
tanning technology. (2 pts.)
2. Assume that Bloomersburg produces only
bats and balls, and that its available resources
are completely adaptable to both purposes.
a. Sketch a correctly labeled PPC for
Bloomersburg. (2 pts.)
b. Draw and label a point on the PPC that
shows Bloomersburg operating at full
employment and productive efficiency. (1 pt.)
c. Draw a new curve on your PPC that
shows the effect of an improvement in woodturning lathes in Bloomersburg. (2 pts.)