Review From last Class What does “marginal” mean? T or F: You should continue consuming...
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Review From last ClassReview 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 ClassReview From last Class
Roller CoasterRides Marginal Utility Total Utility
1 9 92 7 163 3 194 1 205 -2 186 -5 13
* Remember Marginal Utility = Marginal Benefit - Marginal Cost
Production Possibilities Production Possibilities CurvesCurves
IntroductionIntroduction
Production Possibilities Curve: A Graph that shows all the different ways a business or nation can use it’s resources.
IntroductionIntroduction
In order to graph a production possibilities curve, you first need to have a production possibilities table/schedule.
Let’s Walk Through an ExampleLet’s Walk Through an Example
Let’s suppose we own a restaurant that only makes two products, pizza and calzone.
ExampleExample
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.
ExampleExample
Let’s assume that through our research, we can choose to produce at any point on the chart below:
Pizza CalzoneOption A 10 0Option B 7 4Option C 4 5Option D 0 9
Example-Real World DecisionExample-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!Pizza Calzone
Option A 10 0Option B 7 4Option C 4 5Option D 0 9
Using PPC to Figure Out Using PPC to Figure Out Opportunity CostOpportunity Cost
If we move from option A to option B, we gain 4 calzones…how many pizzas are we giving up?
That is the opportunity cost!
Pizza CalzoneOption A 10 0Option B 7 4Option C 4 5Option D 0 9
Using PPC to Figure Out Using PPC to Figure Out Opportunity CostOpportunity Cost
Remember, an opportunity cost is what we give up when we choose one course of action over another.
1.What is the opportunity cost of producing 10 pizzas instead of 4 pizzas?2.What is the opportunity cost of producing 4 calzones rather than 0 calzones?
Using PPC to Figure Out Using PPC to Figure Out Opportunity CostOpportunity 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 Using PPC to Figure Out Opportunity CostOpportunity Cost
AB
utte
r
Guns7 10 120
15 B
C
D
E
F
12
3 pound of butter
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
PPC Loose EndsPPC 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!
PPCPPC
Let’s graph it on the sideboard.
Law of Increasing Marginal Law of Increasing Marginal Opportunity CostOpportunity 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 Law of Increasing Marginal Opportunity CostOpportunity 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 Law of Increasing Marginal Opportunity CostOpportunity Cost
Example: A B C D E
PIZZA 20 19 16 10 0ROBOTS 0 1 2 3 4
List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e and
graph the chart…
Efficiency and InefficiencyEfficiency and InefficiencyG
uns
10
8
6
4
2
0 2 4 6 8 10
Butter
C D
A
B
Efficientpoints
Inefficientpoint
Unattainable point, given available technology, resources and labor force
Tom’s Trade-offs: The Tom’s Trade-offs: The Production Possibility Production Possibility
FrontierFrontier
Shifts in the Production Shifts in the Production Possibility CurvePossibility Curve
Society can produce more output if:Technology is improved.More resources are discovered.Population increase.
Examples of Shifts in the Examples of Shifts in the Production Possibility CurveProduction 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.