Scarcity
• Society has unlimited wants
• Economic resources are scarce
Economic Resources include:
• land – all gifts of nature
• Labor – all physical and mental talents
• Capital – manufactured aids used in producing
goods and services
• Entrepreneurial ability – takes initiative and risk
Opportunity Cost
• what must be given up in order to get something
Production Possibilities Model
• Graphic representation of opportunity cost
•
Each point on the curve represents some
maximum output of two products
Law of increasing opportunity cost –
• the more of a product that is produced, the greater its
opportunity cost
• Shape of the curve illustrates the law
Guns and butter is a
classic economics
comparison. Guns
represent capital
goods and butter
represents consumer
goods.
Production possibilities curve may shift if:
• Increase in
resources
• Advances in
technology
Production
Possibilities
Curve Practice
Assume the economy
represented is presently
producing 12 units of Good B
and 0 units of good A.
1. The opportunity cost of increase production of Good A from 0
units to 1 unit is the loss of _____________ unit(s) of Good B.
2. The opportunity cost of increasing production of Good A from 1
unit to 2 units is the loss of ________ units(s) of Good B.
3. The opportunity cost of increasing production of Good A from 2 units to 3 units is the loss of
______ unit(s) of Good B.
4. This is an example of ________________ opportunity cost per unit for Good A.
Assume the economy
represented is presently
producing 12 units of Good B
and 0 units of good A.
1. The opportunity cost of increase production of Good A from 0
units to 1 unit is the loss of
2 unit(s) of Good B.
2. The opportunity cost of increasing production of Good A from 1
unit to 2 units is the loss of
2 units(s) of Good B.
3. The opportunity cost of increasing production of Good A from 2 units to 3 units is the loss of
2
unit(s) of Good B.
4. This is an example of constant opportunity cost per unit for Good A.
More
Production
Possibilities
Practice
Assume the economy
represented
Is currently producing 12 units of
Good B and 0 units of Good A.
1. The opportunity cost of increasing production of Good A from 0 units to 1 unit is the loss of
_____unit(s) of Good B.
2. The opportunity cost of increasing production of Good A from 1 unit to 2 units is the loss of
_____ unit(s) of Good B.
3. The opportunity cost of increasing production of Good A from 2 units to 3 units is the loss of
____ unit(s) of Good B.
4. This is an example of _____ opportunity cost per unit for Good A.
Assume the economy
represented
Is currently producing 12 units of
Good B and 0 units of Good A.
1. The opportunity cost of increasing production of Good A from 0 units to 1 unit is the
loss of 2 unit(s) of Good B.
2. The opportunity cost of increasing production of Good A from 1 unit to 2 units is the
loss of
4 unit(s) of Good B.
3. The opportunity cost of increasing production of Good A from 2 units to 3 units is the
loss of
6 unit(s) of Good B.
4. This is an example of increasing opportunity cost per unit for Good A.
More
Production
Possibilities
Practice
Production Possibilities Curve Practice
•
•
•
•
•
Assume that the following data represents 4 years of GDP for the US.
Assume that “Efficient” levels of production would create 5% unemployment.
Show the four years on a single PPC graph.
Show each year as a point on the graph and show new frontiers if appropriate.
Label the PPC graph correctly.
Year A
Year B
Year C
Year D
GDP for the year
10 Trillion Dollars
11 Trillion Dollars
15 Trillion Dollars
16.5 Trillion Dollars
Unemployment %
10%
5%
10%
5%
Consumer Goods
HINT – start like this
Capital Goods
Year A
Year B
Year C
Year D
GDP for the year
Unemployment %
10 Trillion Dollars
11 Trillion Dollars
15 Trillion Dollars
16.5 Trillion Dollars
10%
5%
10%
5%
Consumer Goods
A
Capital Goods
Year A
Year B
Year C
Year D
GDP for the year
Unemployment %
10 Trillion Dollars
11 Trillion Dollars
15 Trillion Dollars
16.5 Trillion Dollars
10%
5%
10%
5%
Consumer Goods
B
A
Capital Goods
Year A
Year B
Year C
Year D
GDP for the year
Unemployment %
10 Trillion Dollars
11 Trillion Dollars
15 Trillion Dollars
16.5 Trillion Dollars
10%
5%
10%
5%
Consumer Goods
B
C
A
Capital Goods
Year A
Year B
Year C
Year D
GDP for the year
Unemployment %
10 Trillion Dollars
11 Trillion Dollars
15 Trillion Dollars
16.5 Trillion Dollars
10%
5%
10%
5%
Consumer Goods
D
B
C
A
Capital Goods
Year A
Year B
Year C
Year D
GDP for the year
Unemployment %
10 Trillion Dollars
11 Trillion Dollars
15 Trillion Dollars
16.5 Trillion Dollars
10%
5%
10%
5%
Supply and Demand
Change in quantity supplied
• Caused by a price change
• Movement along the curve
Change in supply
• caused by determinants of supply
• Shift of the curve
Change in quantity demanded
• Caused by price change
• Movement along the curve
Change in demand
• Caused by determinants of demand
• Shift of the curve
Price Ceiling
Price
Floor
Basic Economic Concepts Test
Questions
If an effective price floor is removed from a market for good, then the price and quantity of the good sold will change in
which of the following ways?
a.
b.
c.
d.
e.
Price
Increase
Increase
Decrease
No change
Decrease
Quantity
Increase
Decrease
Decrease
Increase
Increase
Which of the following would best explain an inward shift of the production possibilities curve?
a. A decrease in the quantity of inputs required to produce a unit of output.
b. An increase in the rate of savings.
c. A decrease in the quality of human capital
d. A decrease in the government’s budget deficit that leads to lower real interest rates.
e. An increase in the labor force participation rate.
The best combination of belts and coats for this economy is
a. 95 belts and 1 coat
b. 85 belts and 2 coats
c. 70 belts and 3 coats
d. 40 belts and 4 coats
e. indeterminate with the available information
Which of the following could explain the movement from point B to point A?
a. An increase in consumer income.
b. An increase in the price of a complementary good.
c. An increase in the price of a substitute good.
d. An increase in the price of the good
e. None of the above.