Review From last Class
What does “marginal” mean?
 T or F: You should continue
consuming something as long as
marginal benefit > marginal cost.
 If MB is $7 and MC is $10, what is the
overall utility?
 What is the Law of Diminishing
marginal utility?

Review From last Class
Roller Coaster
Rides
1
2
3
4
5
6
Marginal Utility
9
7
3
1
-2
-5
Total Utility
9
16
19
20
18
13
* Remember Marginal Utility = Marginal Benefit - Marginal Cost
Production Possibilities
Curves
Introduction

Production Possibilities Curve: A
Graph that shows all the different
ways a business or nation can use it’s
resources.
Introduction

In order to graph a production
possibilities curve, you first need to
have a production possibilities
table/schedule.
Let’s Walk Through an Example

Let’s suppose we own a restaurant
that only makes two products, pizza
and calzone.
Example

Does anyone disagree with the
following statement???

The more pizzas we make, the less
calzones we will be able to make b/c
we have a limited amount of cheese,
sauce, workers, oven space, etc.
Example

Let’s assume that through our
research, we can choose to produce
at any point on the chart below:
Option A
Option B
Option C
Option D
Pizza
10
7
4
0
Calzone
0
4
5
9
Example-Real World Decision
Let’s assume that pizzas and calzones
sell for $5 each (cost to make each is
the same)
 Which option should we choose to
produce at? Why?

Look on sideboard!
Option A
Option B
Option C
Option D
Pizza
10
7
4
0
Calzone
0
4
5
9
Using PPC to Figure Out
Opportunity Cost
Option A
Option B
Option C
Option D

Pizza
10
7
4
0
Calzone
0
4
5
9
If we move from option A to option B,
we gain 4 calzones…how many pizzas
are we giving up?
That
cost!
is the opportunity
Using PPC to Figure Out
Opportunity Cost
Remember, an opportunity cost is what
we give up when we choose one course
of action over another.
1.
2.
What is the opportunity cost of producing
10 pizzas instead of 4 pizzas?
What is the opportunity cost of producing
4 calzones rather than 0 calzones?
Using PPC to Figure Out
Opportunity Cost

Finally…how do we figure out the
same thing using a graph instead
of a chart?

Pay attention closely to the next
slide…it is exactly like 2 test
questions.
Using PPC to Figure Out
Opportunity Cost
3 pound 15 A
of butter
B
C
12
Butter
D
E
F
0
McGraw-Hill/Irwin
7
10
12
Guns
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
PPC Loose Ends
Vocab:
“Guns or Butter”: a phrase that refers to the
trade-off that nations face when choosing
to produce more or less military or
consumer goods.
Lets label the PPC!
PPC

Let’s graph it on the sideboard.
Law of Increasing Marginal
Opportunity Cost
The Law of increasing marginal
opportunity cost states that
opportunity costs increase the more
you concentrate on an activity.
 In order to get more of something,
one must give up ever-increasing
quantities of something else.

Law of Increasing Marginal
Opportunity Cost
Why is the Law of Increasing Marginal
Utility Cost true? This is tough…
 Because economic resources are not
completely adaptable to alternate
uses.
 Confused? OK, good!

Law of Increasing Marginal
Opportunity Cost

Example:
PIZZA
 ROBOTS

A
B
C
D
E
20
0
19
1
16
2
10
3
0
4
List the Opportunity Cost of moving
from a-b, b-c, c-d, and d-e and
graph the chart…
Efficiency and Inefficiency
Unattainable point,
given available technology,
resources and labor force
10
Guns
8
6
C
Efficient
points
B
4
2
0
Inefficient
point
2
4
D
Butter
A
6
8
10
Production Possibility
Frontier
Shifts in the Production
Possibility Curve

Society can produce more output if:
Technology is improved.
 More resources are discovered.
 Population increase.

Examples of Shifts in the
Production Possibility Curve

Test your understanding:
A new technology is discovered that
doubles the speed at which all goods
can be produced.
 Global warming increases the cost of
producing agricultural goods.
