Today
Continue our introduction to economics.
 Conclude Ch. 1 and Begin Ch. 2

The Economic Way of Thinking
A Special Way of Looking at the
World
People Act with Rational SelfInterest
Rational: consistent with one’s goals,
taking all relevant information into account.
 Self-interest: One’s self interest may
include altruism.

Consider All Costs
Ex: What is the cost of going to a movie?
 Explicit cost: the money spent on tickets,
popcorn, gas, etc.
 Implicit cost: the value of time--what was
the next best use of your time, and how
much was that worth?

Consider All Costs, Cont’d.
Opportunity Cost: The total implicit &
explicit cost of an activity.
 SAME AS: the value of the resources used
in their next best alternatives.

Marginal Decision-Making
Most of our choices are about how much to
buy or do.
 When deciding whether to buy one more,
look at the marginal benefit versus the
marginal cost.

Prices as Signals
Prices signal the flow of resources into or
out of industries.
 Ex: High prices for coal lead firms to buy
more machinery, hire more workers to mine
coal.
 Ex: Expectations that a lot of money can be
made in dot.com ventures leads people to
get education leading to that career path.

Chapter 2
Some Tools of Economic Analysis
Comparative Advantage

A producer has a comparative advantage in
making a good if it can do so at a lower
opportunity cost than another producer.
Specialization of Labor

When a person has a natural aptitude for
doing a task, they can do it for a lower cost.
–

Ex: soldiers, artists, nurses, talk-show hosts,
computer programmers
Specialization of labor makes it more
desirable to make a limited range of goods.
Division of Labor

When a person performs smaller tasks, he
can be more productive.
–
–

Writing out a punishment
Ford’s assembly line
Division of labor makes it more desirable to
make a limited range of goods.
Exchange

We can jointly produce a lot more stuff by
specializing and exchanging among
ourselves than by being independent.
–
Ex: Unabomber
Opportunity Cost from a Grand
Perspective
The world has opportunity costs!
 Ultimately, it is limited resources that force
us to make choices in what we produce.

Production Possibilities Frontier
Suppose we can lump everything into two
types of goods: military or consumer.
 In any given year, we are limited in how
much labor, capital, and other resources we
can use to produce goods & services.
 We cannot make unlimited quantities of
either type of good.

Production Possibilities Frontier
Shows all of the possible combinations of
consumer and military goods that can be
produced by an economy in a year.
 Drawn for a given quantity of inputs
available.

Production Possibilities Frontier


The PPF
separates those
combs. which
can be
produced from
those that
cannot.
Can you
interpret each
point?
Butter
C
A
E
D
B
Guns
Opportunity Cost & the PPF

The opp.
cost of
making
one more
gun is
butter
foregone.
Butter
A
C
D
F
1
2
3 Guns
Opp. Cost & the PPF
The opp. cost of making one more gun is
higher, the greater the current output of
guns.
 A similar statement is true for butter.
 This leads to a bowed-out PPF.

Opp. Cost & the PPF
Opp. cost rises, because some inputs are
more readily used to produce a particular
good (ex: land & metal).
 As you produce more guns (& less butter)
you find that you are forced to make
additional guns using mostly add’l land.
This is very costly in terms of butter, &
doesn’t yield more guns very easily.

Purpose of the PPF
It illustrates our choices.
 It helps us understand that trade-offs must
be made.
 It doesn’t help us choose.

Next Time
Continue Ch. 2, Begin Ch. 3.
 If you need help understanding graphs, then
be sure to study the appendix to Ch. 1!

Group Work
Shifts in the PPF
Instructions

For each of the four scenarios :
–
–

Draw an initial PPF. Be sure to label the axes.
Show a new PPF on the same graph that
represents how the PPF will shift for that
scenario. Be sure to indicate which is the old
PPF and which is the new PPF.
You should have 4 graphs, each with 2 PPFs
on it.
PPF of Military & Consumer
Goods
What would technological progress do?
 What would a devastating war do to the
PPF?
 What would more available labor do to the
PPF?
 What would more available metal do to the
PPF?
