Unit 1: Basic Economic Concepts

Presentation on theme: "Unit 1: Basic Economic Concepts"— Presentation transcript:

Unit 1: Basic Economic Concepts

Draw Production Possibilities Graph for the Ford Motor Co
Draw Production Possibilities Graph for the Ford Motor Co. using the following information, Make cars the Y-axis and Trucks the X-axis: A B C D E F G Cars 10 18 25 30 33 35 Trucks 45 42 39 15

The Economizing Problem…
WE HAVE A PROBLEM!! The Economizing Problem… Scarcity Society has unlimited wants but unlimited resources

Business Cycle Depression- Deep prolonged downturn Recessions-
Periods in which output and employment are falling Employment- Total number of people currently working Unemployment- Total number of people looking for work Rate- Percentage of labor force that is unemployed STRONGETS INDICATOR of the job market

Unemployment cont.… Output- Quantity of goods and services produced Moves in opposite direction as unemployment Labor Force= Employed + Unemployed Aggregate Output Total production over a given time period

Inflation v. Deflation Inflation- Rise in the overall price level
(Decrease in value of dollar) people get rid of Deflation- fall in the overall price level (Increase in value of dollar) Economic Goal Price Stability- Little to no change in prices

Economic Growth/Models
Increase in output Fundamental in prosperity Models- allows economists to study changes

The Production Possibilities Curve (PPC) Using Economic Models…
Step 1: Explain concept in words Step 2: Use numbers as examples Step 3: Generate graphs from numbers Step 4: Make generalizations using graph

The Production Possibilities Curve
All models have simplifying assumptions: Available supply of resources is fixed in quantity and quality at this point in time. Technology is constant during analysis. Economy produces only two types of products.

Opportunity Cost - Constant
A PPC with a straight line has a constant slope, and therefore, constant opportunity cost.

Opportunity Cost - Increasing
Question for Students: If we want more bulldozers, and if we were controlling this economy, what would we need to do? We would need to move some pizza makers (and capital, and natural resources) to bulldozer production. Has anyone ever had a bad pizza or a great pizza? Is it safe to say that not all pizzas are created equal? Then is it also safe to say that not all pizza makers (the labor) are created equal? Are some pro athletes better than others? Are some acres of land more fertile (for growing food) than others? Are all laptop computers equal, or are some faster than others? The point is that resources are not created equal. Can the students agree that some units of labor are better pizza makers than others? If that’s the case, then let’s redraw the PPC. Redraw the PPC with a concave shape. You don’t need numbers. There is something that economists call the “Law of increasing opportunity costs” 1. The amount of other products that must be foregone to obtain more of any given product is called the opportunity cost. 2. The more of a product produced the greater is its (marginal) opportunity cost. 3. The slope of the production possibilities curve becomes steeper (going left to right), demonstrating increasing opportunity cost. This makes the curve appear bowed out, concave from the origin. Why? 1. Economic recourses are not completely adaptable to alternative uses. 2. To get increasing amounts of Bulldozers, resources that are not particularly well suited for that purpose must be used. Workers that are accustomed to producing Pizza in a restaurant may not do well as heavy equipment builders. A pizza oven is a piece of capital equipment that is not very adaptable to building Bulldozers.

Economic Growth Economic growth
Expansion of the economy’s production possibilities Availability of resources (land, labor, capital, entrepreneurship) Technology Economic growth means an expansion of the economy’s production possibilities: the economy can produce more of everything.

Economic Growth Draw a new PPC that has shifted outward in a roughly parallel manner. How could this happen? When factors of production expand in quantity or quality. A bigger or a more educated/skilled work force. When technological advances are occurring. Technology always advances, we don’t forget our technology.

Production “Possibilities” Table
f 14 12 9 5 2 4 6 8 10 Bikes Computers Each point represents a specific combination of goods that can be produced given full employment of resources. NOW GRAPH IT: Put bikes on y-axis and computers on x-axis

Production Possibilities
How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? 14 12 10 8 6 4 2 Impossible/Unattainable (given current resources) A B G C Bikes Efficient D Inefficient/ Unemployment E Computers

Opportunity Cost Example:
1. The opportunity cost of moving from a to b is… 2 Bikes 2.The opportunity cost of moving from b to d is… 7 Bikes 3.The opportunity cost of moving from d to b is… 4 Computer 4.The opportunity cost of moving from f to c is… 0 Computers 5.What can you say about point G? Unattainable

The Production Possibilities Curve (or Frontier)

Production Possibilities
A B C D E CALZONES PIZZA List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. Constant Opportunity Cost- Resources are easily adaptable for producing either good. Result is a straight line PPC (not common)

Production Possibilities
A B C D E PIZZA ROBOTS List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. Law of Increasing Opportunity Cost- As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Why? Resources are NOT easily adaptable to producing both goods. Result is a bowed out (Concave) PPC

Constant vs. Increasing Opportunity Cost
Identify which product would have a straight line PPC and which would be bowed out? Corn Cactus Wheat Pineapples

PER UNIT Opportunity Cost How much each marginal unit costs
Units Gained Example: 1. The PER UNIT opportunity cost of moving from a to b is… 1 Bike 2.The PER UNIT opportunity cost of moving from b to c is… 1.5 (3/2) Bikes 3.The PER UNIT opportunity cost of moving from c to d is… 2 Bikes 4.The PER UNIT opportunity cost of moving from d to e is… 2.5 (5/2) Bikes NOTICE: Increasing Opportunity Costs

The Production Possibilities Curve and Efficiency

Two Types of Efficiency
Productive Efficiency- Products are being produced in the least costly way. This is any point ON the Production Possibilities Curve Allocative Efficiency- The products being produced are the ones most desired by society. This optimal point on the PPC depends on the desires of society. 23

Productive and Allocative Efficiency
Which points are productively efficient? Which are allocatively efficient? 14 12 10 8 6 4 2 Productively Efficient combinations are A through D A B G Allocative Efficient combinations depend on the wants of society (What if this represents a country with no electricity?) Bikes C E F D Computers 24

Why two types of efficiency? Is combination “A” efficient?
Yes and No. It is productively efficient but it is not the combination society wants Size 20 running shoes A Size 10 running shoes

Shifting the Production Possibilities Curve

3 Shifters of the PPC Production Possibilities
4 Key Assumptions Revisited Only two goods can be produced Full employment of resources Fixed Resources (4 Factors) Fixed Technology What if there is a change? 3 Shifters of the PPC 1. Change in resource quantity or quality 2. Change in Technology 3. Change in Trade

Production Possibilities
What happens if there is an increase in population? Robots Pizzas

Production Possibilities
What happens if there is an increase in population? Robots Pizzas 29

Production Possibilities
What if there is a technology improvement in pizza ovens Robots Pizzas 30

Production Possibilities
What if there is a technology improvement in pizza ovens Robots Pizzas 31

Capital Goods and Future Growth
Countries that produce more capital goods will have more growth in the future. Panama – Favors Consumer Goods Mexico – Favors Capital Goods Current PPC Future PPC Future PPC Capital Goods Current PPC Capital Goods Consumer goods Consumer goods Panama Mexico

PPC Practice Draw a PPC showing changes for each of the following:
Pizza and Robots (3) 1. New robot making technology 2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows Consumer goods and Capital Goods (4) 4. Destruction of power plants leads to severe electricity shortage 5. Faster computer hardware 6. Many workers unemployed 7. Significant increases in education

New robot making technology
Question #1 New robot making technology Q A shift only for Robots Robots Q Pizzas 34

Question #2 Decrease in the demand for pizza Q
The curve doesn’t shift! A change in demand doesn’t shift the curve Robots Q Pizzas 35

Mad cow disease kills 85% of cows A shift inward only for Pizza
Question #3 Mad cow disease kills 85% of cows Q A shift inward only for Pizza Robots Q Pizzas 36

Question #4 BP Oil Spill in the Gulf Q
Decrease in resources decrease production possibilities for both Capital Goods (Guns) Q Consumer Goods (Butter) 37

Question #5 Faster computer hardware Q
Quality of a resource improves shifting the curve outward Capital Goods (Guns) Q Consumer Goods (Butter) 38

Question #6 Many workers unemployed Q The curve doesn’t shift!
Unemployment is just a point inside the curve Capital Goods (Guns) Q Consumer Goods (Butter) 39

Question #7 Significant increases in education Q
The quality of labor is improved. Curve shifts outward. Capital Goods (Guns) Q Consumer Goods (Butter) 40