Unit 1: Basic
Economic Concepts
1
Quick Review
Basic Economic Concepts
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 32nd 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 Resources
Fixed Technology
5
Production Possibilities
A
B
C
D
E
4
3
2
1
0
Calzones 0
1
2
3
4
Pizzas
Pizzas
Robots
20
C
E
20 19 16 10
0
0
1
2
C
2
3
4
B
C
D
8
D
1
1
D
12
B
2
0
A
16
A
3
B
Pizzas
Pizzas
4
A
3
4
E
4
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
adaptable for producing
either good.
• Result is a straight line PPC
(not common)
E
0
4
B
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:
 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.
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 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
6
4. The opportunity cost of
D
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
B
12
cost of moving from B to C is…
10
1.5 (3/2) Bikes
C
3. The PER UNIT opportunity
8
cost of moving from C to D is…
6
D
2 Bikes
4
4. The PER UNIT opportunity
2
cost of moving from D to E is…
E
0
2.5 (5/2) Bikes
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?
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?
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




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
Robots
Production Possibilities
What happens if there is
an increase in population?
Pizzas
Pizzas
20
Robots
Robots
Production Possibilities
What if there is a technology
improvement in pizza ovens
Pizzas
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
Q
Pizzas
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
Q
Pizzas
24
Question #3
Mad cow disease kills 85% of cows
Robots
Q
A shift inward only for
Pizza
Q
Pizzas
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
Q
Consumer Goods (Butter)
27
Question #6
Many workers unemployed
Capital Goods (Guns)
Q
The curve doesn’t shift!
Unemployment is just a
point inside the curve
Q
Consumer Goods (Butter)
28
Question #7
Significant increases in education
Capital Goods (Guns)
Q
The quality of labor is
improved. Curve shifts
outward.
Q
Consumer Goods (Butter)
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
Capital Goods
Current
PPC
Current
PPC
Consumer goods
Mexico
30