
1


2

Resources
are scarce
You can’t always get what you want so
everyone must make choices.
Choices can be dependent on money
but also time.
Why do individuals have to make
choices?
BECAUSE RESOURCES ARE SCARCE
3
 Resource
is anything that can be used to
produce something else
 lists of the economy’s resources:
o land
o labor (the time of workers)
o capital (machinery, buildings, and other man-
made productive assets)
o human capital (the educational achievements
and skills of workers) (your book calls this
entrepreneurial ability)
4
A
resource is scarce when there’s not enough of
the resource available to satisfy all the various
ways a society wants to use it
 Examples are natural resource, human resources
(labor, skill, intelligence) and even clean air and
water
 The scarcity of resources means that society as a
whole must make choices
 One way to make choices is to allow them to
emerge as the result of many individual choices –
which is what happens in a market economy
5

6

 The
real cost of an item is its opportunity cost –
what you give up in order to get it
 The concept of opportunity cost is crucial to
understanding individual choice because, in the
end, all costs are opportunity costs. Every choice
you make means forgoing some other alternative
 Some important decisions involve an “either-or”
choice
 Example: You decide either to go to college or to
begin working, you decide whether to take
economics or to take something else
7
But
other important decisions involve
“how much” choices
Example: you are taking both AP
Economics and AP Chemistry, you must
decide how much time to spend
studying for each
8
 How
Much” decisions is a decision to make
at the margin – comparing the costs and
benefits of doing a little bit more of an
activity versus doing a little bit less –known
as marginal decisions and the study of which
is known as Marginal analysis
 Usually in a decision made at the margin,
you decision is involving a “trade-off” which
is a comparison of costs and benefits
9
 Opportunity
Costs is the real cost of something
you must give up to get it
 When making decisions, it is crucial to think in
terms of opportunity cost, because the
opportunity cost of an action is often
considerably more than the cost of any outlays of
money
 Opportunity Costs can be broken into two parts:
Explicit costs
Implicit costs
10
 Explicit
Costs is a cost that requires an outlay of
money
 Implicit Costs, does not involve an outlay of money;
instead, it is measured by the value, in dollar
terms, of the benefits that are forgone
 Example:
o EC: an additional year of college requires tuition
o IC: an additional year of college includes the
income you would have earned in your have
taken a job instead
11
12

13

To
think about the trade-offs that face
any economy (comparing the costs and
benefits), economists use the
Production Possibilities Curve
The model is used to improve our
understanding of trade-offs by
considering a simplified economy that
produces only two goods
14
The following graph is a hypothetical
production possibilities curve for Tom, a
castaway as seen in the movie Cast Away.
He must make a trade-off between
production of fish and production of
coconuts
15
The frontier
– the
line in the diagram
– shows
What
is the
maximum
quantity
of
the maximum quantity of fish Tom can catch
fishaTom
can catch
if heof also
during
week GIVEN
the quantity
coconuts
he 9,
gathers,
and30
vicecoconuts?
versa.
gathers
15 or
Quantity of coconuts
D
30
Feasible and
efficient
in production
Not feasible
A
15
9
Feasible
but
not efficient
B
C
Production possibility frontier
PPF
0
20
28
40
Quantity of fish
Quantity of coconuts
PointsDistinction
that liebetween
outside
the
PPC
points
are
hypothetical
points
that
are
INSIDE
or ON the PPC:
shaded
area
points insidenot
or onfeasible
the frontier is feasible
D
30
Feasible and
efficient
in production
Not feasible
A
15
9
Feasible
but
not efficient
B
C
Production possibility frontier
PPF
0
20
28
40
Quantity of fish

18

 PPC
illustrates the economic concept of efficiency
(an economy is efficient if all opportunities to make
some people better off without making other
people worse off are taken)
 Key element of efficiency is that there are no
missed opportunities in production – there is no
way to produce more of one good without
producing less of other goods
 As long as Tom is on the PPC frontier, his
production is efficient
19
If an economy is producing at a point on its production
possibility frontier, we say that the economy is efficient
in production
 But…. if Tom was at point C it would be a one-person
economy and this is not efficient in production and
would be inefficient—producing more of both goods
 Example in the economy is when people are
involuntarily unemployed, they want to work but are
unable to find jobs and this means the economy is not
efficient in production because it could be producing
more output is these people were employed

20



PPC helps to clarify what it means for an economy to be
efficient in production BUT efficiency in production is only
part of what’s required for the economy as a whole to be
efficient
Efficiency also requires that the economy allocates its
resources so that consumers are as well off as possible –
efficiency in allocation
Efficiency for the economy as a whole requires both
efficiency in production and efficiency in allocation; to be
efficient, an economy must produce as much of each good
as it can given the production of other goods, and it must
also produce the mix of goods that people wasn’t to
consume
21
Quantity of coconuts
D
30
Feasible and
efficient
in production
Not
feasible
A
15
9
Feasible
but
not efficient
B
C
Production possibility frontier
PPF
0
20
28
40
Quantity of fish
 How
does unemployment, unused
production and economic downturns affect
the PPC?
 Analysis and conclusion change because we
can’t assume that all available resources are
fully employed
 Unemployment can change the PPC curve
o Show graphically by placing points inside the
original production possibilities curve
23

24

 PPC
also shows that the true cost of any good is
not just the amount of money it costs to buy, but
everything else in addition to money that must be
given up in order to get that good – the opportunity
cost
 The slope of a straight-line PPC is equal to the
opportunity cost – specifically, the opportunity cost
for the good measured on the horizontal axis in
terms of the good measured on the vertical access
25
 Law
of increasing opportunity cost – when the
production of a particular good increases, the
opportunity cost of producing an additional unit
rises
 Increasing opportunity costs – the more fish that
Tom catches, the more coconuts he has to give up
to catch an additional fish
 When opportunity costs are increasing rather than
constant, the production possibilities frontier is a
bowed-out curve rather than a straight line
26
Quantity of coconuts
35
…requires giving up
5 coconuts
Producing the first
20 fish . . .
But producing
20 more fish . . .
30
A
25
20
15
…requires giving up
25 more coconuts…
10
When more
of a good is produced, its opportunity
5
PPF are
cost typically rises because well-suited inputs
10 adaptable
20
30
40 be used
50
used up0 and less
inputs
must
Quantity of fish
instead

28

 PPC
can show economic growth
 Remember, economic growth is the growing
ability of the economy to produce goods and
services
 It literally means that the economy can
produce more of everything—it is showed on
a PPC as a point that lies outside the original
frontier. On the PPC, growth is shown as an
outward shift of the frontier
29
 What
1.
leads to this?
Increase in the economy’s factors of production
(resources used to produce goods and services)
o
2.
includes land, labor, capital, entrepreneurial ability
Increase in progress in technology (technical
means for the production of goods and services)
o
innovations in the techniques we use to produce goods
and services have been a crucial force behind
economic growth
30
Quantity of coconuts
Economic
growth
in an
Production
is initially
The
economy
can results
nowat point
outward
shift
the
PPF
A (20 fish
andof
25
coconuts),
produce
more
of
everything.
because
 it canproduction
move to point E (25
possibilities
expanded.
fish and 30 are
coconuts).
35
E
30
A
25
20
15
10
5
Original
New
PPF
PPF
0
10
20
25
30
40
50
Quantity of fish

32


33

Resources
are scarce
Why
do individuals have to make
choices?
BECAUSE RESOURCES ARE SCARCE
34
 Resource
is anything that can be used to
produce something else
 lists
of the economy’s resources:
o land
o labor
o capital
o human capital (your book calls this
entrepreneurial ability)
35
A
resource is scarce when there’s not
enough of the resource available to satisfy
all the various ways a society wants to use it
 Examples are natural resource, human
resources (labor, skill, intelligence) and even
clean air and water
 One way to make choices is to allow
individual choices – which is what happens
in a market economy
36

37

 The
real cost of an item is its opportunity cost –
what you give up in order to get it
 Some
important decisions involve an “either-or”
choice
38
But
other important decisions involve
“how much” choices
Example:
you are taking both AP
Economics and AP Chemistry, you must
decide how much time to spend
studying for each
39
 “How
Much” decisions is a decision to make
at the margin – comparing the costs and
benefits of doing a little bit more of an
activity versus doing a little bit less
A
decision made at the margin, involves a
“trade-off” which is a comparison of costs
and benefits
40
 Decisions
are made using the concept of
opportunity cost, because the opportunity cost of
an action is often considerably more than the
cost of any outlays of money
 Opportunity
Costs can be broken into two parts:
Explicit costs
Implicit costs
41
 Explicit
Costs is a cost that requires an outlay of
money
 Implicit Costs, does not involve an outlay of money;
instead, it is measured by the value, in dollar
terms, of the benefits that are forgone
 Example:
o EC: an additional year of college requires tuition
o IC: an additional year of college includes the
income you would have earned in your have
taken a job instead
42

43

Used
to show the trade-offs that face
any economy, economists use the
Production Possibilities Curve
The
model is used to help understand
trade-offs by considering a simplified
economy that produces only two goods
44
The frontier – the line in the diagram – shows
the maximum quantity of fish Tom can catch
during a week GIVEN the quantity of coconuts
he gathers, and vice versa.
Quantity of coconuts
D
30
A
15
B
9
C
Production possibility frontier
PPF
0
20
28
40
Quantity of fish

46

 PPC
illustrates the economic concept of efficiency
 Key
element of efficiency is that there are no
missed opportunities in production – there is no
way to produce more of one good without
producing less of other goods
 As
long as Tom is on the PPC frontier, his
production is efficient
47
 An
efficient in production economy is producing at
a point on its production possibility frontier
 Example
in the economy is when people are
involuntarily unemployed, they want to work but are
unable to find jobs and this means the economy is
not efficient in production because it could be
producing more output is these people were
employed
48
 Efficiency
also requires that the economy be
efficient in allocation – allocating its resources so
that consumers are as well off as possible
 Efficiency
for the economy as a whole requires
both efficiency in production and efficiency in
allocation
49
Quantity of coconuts
D
30
A
15
B
9
C
Production possibility frontier
PPF
0
20
28
40
Quantity of fish
 How
does unemployment, unused
production and economic downturns affect
the PPC?
It changes because we can’t assume that all
available resources are fully employed
 Unemployment can change the PPC curve
o Show graphically by placing points inside the
original production possibilities curve
51

52

 PPC
also shows opportunity costs
 The
slope of a straight-line PPC is equal to the
opportunity cost – specifically, the opportunity cost
for the good measured on the horizontal axis in
terms of the good measured on the vertical access
53
 Law
of increasing opportunity cost – when the
production of a particular good increases, the
opportunity cost of producing an additional unit
rises
 Increasing opportunity costs – the more fish that
Tom catches, the more coconuts he has to give up
to catch an additional fish
 When opportunity costs are increasing rather than
constant, the production possibilities frontier is a
bowed-out curve rather than a straight line
54
Quantity of coconuts
35
30
A
25
20
15
10
5
PPF
0
10
20
30
40
50
Quantity of fish

56

 PPC
can show economic growth
 Remember, economic growth is the growing
ability of the economy to produce goods and
services
 It literally means that the economy can
produce more of everything—it is showed on
a PPC as a point that lies outside the original
frontier.
o On the PPC, growth is shown as an outward shift
of the frontier
57
 What
leads to this?
1.
Increase in the economy’s factors of production
(resources used to produce goods and services)
2.
Increase in progress in technology (technical
means for the production of goods and services)
58
Quantity of coconuts
35
E
30
A
25
20
15
10
5
Original
New
PPF
PPF
0
10
20
25
30
40
50
Quantity of fish