Scarcity, Opportunity Costs, and the Production Possibilities Curve
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Scarcity, Opportunity Costs, and the Production Possibilities Curve 1
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Scarcity, Opportunity Costs, and the Production Possibilities Curve. Scarcity. Scarcity. 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? - PowerPoint PPT Presentation
Transcript of Scarcity, Opportunity Costs, and the Production Possibilities Curve
1
Scarcity, Opportunity Costs, and the Production Possibilities Curve
2 Scarcity
3
Scarcity 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
4
Scarcity Resource is anything that can be
used to produce something else lists of the economy’s resources:
o lando 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)
5
Scarcity 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
6 Opportunity Costs
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Opportunity Costs 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
8
Opportunity Costs 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
9
Opportunity Costs 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
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Explicit Costs vs. Implicit Costs
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 costsImplicit costs
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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 tuitiono IC: an additional year of college
includes the income you would have earned in your have taken a job instead
12
Opportunity Cost of an Additional Year of School
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Production Possibilities Curve
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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
15
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
2820 400
30
9
15
Quantity of coconuts
Production possibility frontier
A
B
D
C
Feasible and efficientin production
Not feasible
PPF
Quantity of fish
Feasible butnot efficient
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.
What is the maximum quantity of fish Tom can catch if he also gathers 9, 15 or 30 coconuts?
2820 400
30
9
15
Quantity of coconuts
Production possibility frontier
A
B
D
C
Feasible and efficientin production
Not feasible
PPF
Quantity of fish
Feasible butnot efficient
Distinction between points INSIDE or ON the PPC: shaded
areapoints inside or on the frontier
is feasible
Points that lie outside the PPC are
hypothetical points that are not feasible
18 Efficiency
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Efficiency 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
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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
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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
2820 400
30
9
15
Quantity of coconuts
Production possibility frontier
A
B
D
C
Feasible and efficientin production
Not feasible
PPF
Quantity of fish
Feasible butnot efficient
23
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 curveo Show graphically by placing points inside
the original production possibilities curve
24 Opportunity Costs
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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
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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
Increasing Opportunity Cost
A
PPF
10 20 30 40 500
35
30
25
20
15
10
5
Producing the first 20 fish . . .
…requires giving up 25 more coconuts…
…requires giving up 5 coconuts
But producing 20 more fish . . .
Quantity of coconuts
Quantity of fish
When more of a good is produced, its opportunity cost typically rises
because well-suited inputs are used up and less adaptable inputs must be
used instead
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Economic Growth on the PPC Curve
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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
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What leads to this?1. Increase in the economy’s factors of
production (resources used to produce goods and services)o includes land, labor, capital,
entrepreneurial ability
2. 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
Economic GrowthEconomic growth results in an outward shift of the PPF because production possibilities are expanded.
The economy can now produce more of everything.
Production is initially at point A (20 fish and 25 coconuts), it can move to point E (25 fish and 30 coconuts).A
10 20 25 30 40 500
35
30
25
20
15
10
5
E
NewPPF
OriginalPPF
Quantity of coconuts
Quantity of fish
32
Scarcity, Opportunity Costs, and the Production Possibilities Curve
33 Scarcity
34
Scarcity
Resources are scarce
Why do individuals have to make choices? BECAUSE RESOURCES ARE
SCARCE
35
Scarcity Resource is anything that can be
used to produce something else
lists of the economy’s resources: o lando laboro capital o human capital (your book calls this
entrepreneurial ability)
36
Scarcity 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
37 Opportunity Costs
38
Opportunity Costs 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
39
Opportunity Costs 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
40
Opportunity Costs “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
41
Explicit Costs vs. Implicit Costs
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 costsImplicit costs
42
Explicit Costs vs. Implicit Costs
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 tuitiono IC: an additional year of college
includes the income you would have earned in your have taken a job instead
43
Production Possibilities Curve
44
Production Possibilities Curve
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
2820 400
30
9
15
Quantity of coconuts
Production possibility frontier
A
B
D
C
PPF
Quantity of fish
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.
46 Efficiency
47
Efficiency 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
48
Efficiency 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
49
Efficiency 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
Efficiency
2820 400
30
9
15
Quantity of coconuts
Production possibility frontier
A
B
D
C
PPF
Quantity of fish
51
Efficiency 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
curveo Show graphically by placing points inside
the original production possibilities curve
52 Opportunity Costs
53
Opportunity Costs 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
54
Opportunity Costs 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
Increasing Opportunity Cost
A
PPF
10 20 30 40 500
35
30
25
20
15
10
5
Quantity of coconuts
Quantity of fish
56
Economic Growth on the PPC Curve
57
Economic Growth on the PPC Curve
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
58
Economic Growth on the PPC Curve
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)
Economic Growth
A
10 20 25 30 40 500
35
30
25
20
15
10
5
E
NewPPF
OriginalPPF
Quantity of coconuts
Quantity of fish
![Production Possibilities Curve [ better known as the “PPC”]](https://static.fdocuments.us/doc/165x107/56816490550346895dd661af/production-possibilities-curve-better-known-as-the-ppc.jpg)
