Economics
Chapter 1.2 and 1.3
Opportunity Cost and the
Production Possibilities
Curve
Economics
Trade-offs
All individuals and groups of
people make decisions that
involve trade-offs.
•Guns Vs. Butter Trade-off
• Every country has limited resources and
must make decisions between producing
more guns
•or more butter
•Guns represent military goods and services. Butter
represents all consumer goods and services.
Chapter 1
Section
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Opportunity Cost
• Decision making Grid
Alternatives
Chapter 1
Sleep late
Wake early to
study
Benefits
Enjoy more sleep
More energy
Better grade
Teacher/parent
approval
Satisfaction
Decision
Sleep late
Wake up Early
Opportunity Cost
Extra study time
Extra sleep
Benefits foregone
Better grade
Teacher/parent
approval
Satisfaction
Enjoy more sleep
More energy
Section
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Thinking at the Margin
• When you decide how much more or less to do, you are
thinking at the margin.
Chapter 1
Options
Benefit
Opportunity Cost
1st hour of extra
study time
Grade of C on
test
1 hour of
sleep
2nd hour of extra
study time
Grade of B on
test
2 hours of
sleep
3rd hour of extra
study time
Grade of B+ on
test
3 hours of
sleep
Section
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Thinking at the margin with the snooze button
Chapter 1
Section
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Production Possibilities
•
A production possibilities curve (graph) shows alternative ways that
an economy can use its resources.
Production Possibilities Graph
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
Section
b (8,14)
c (14,12)
10
d (18,9)
5
0
Chapter 1
a (0,15)
A production
possibilities frontier
e (20,5)
f (21,0)
5
10
15
20
25
Watermelons (millions of tons)
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Efficiency
Production Possibilities Graph
25
Shoes (millions of pairs)
• Efficiency means using
resources in such a way
as to maximize the
production of goods and
services. An economy
producing output levels
on the production
possibilities frontier is
operating efficiently.
Points underneath the
curve mean that
resources are not being
used completely. That is
called underutilization.
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
g (5,8)
5
d (18,9)
e (20,5)
A point of
underutilization
0
5
10
f (21,0)
15
20
Watermelons (millions of tons)
Chapter 1
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25
Growth
• The production
possibilities frontier is
the line that shows the
maximum possible
output for that
economy.
Chapter 1
Section
Production Possibilities Graph
25
Future production
Possibilities frontier
T
Shoes (millions of pairs)
• Growth economy can
increase its level of
output and grow.
production
possibilities curve
“shifts to the right.”
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
d (18,9)
5
e (20,5)
f (21,0)
0
5
10
15
20
Watermelons (millions of tons)
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25
•Cost and law of Increasing Costs
•Cost = what we give up to choose one option
over the other pg. 17
• Law of Increasing Opportunity Cost• As you produce more of any good, the
opportunity cost(this is the second item) will
increase. More resources are needed to
produce the second item (the one you
decided to produce less of). Pg. 17
• Why? Resources are NOT easily adaptable to
producing both goods.
Chapter 1
Section
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Cost
• A production possibilities graph shows the cost of
producing more of one item. What is cost to move from
C to D?
• To move from point c to point d on this graph has a cost
of 3 million pairs of shoes.
Production Possibilities Graph
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
c (14,12)
10
d (18,9)
5
0
Chapter 1
Section
5
10
15
20
25
Watermelons (millions of tons)
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Economics U.S.A. Video – Scarcity and PPC
1. What is the trade-off discussed with Alaska?
natural beauty versus minerals and gasoline
2. How could there be an increase in both “guns and
butter” during WW2?
We weren’t maximizing the resources in the 30’s because
of the depression. Also there were new technologies
that allowed the ppc to shift outward.
3. What is the trade-off for worker’s safety?
decreased production, higher prices and lost jobs
Chapter 1
Section
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