Chapter 2 Graphing & Slopes © OnlineTexts.com p. 1

A Review of Slopes The slope of a line is the rise over the run, or the Y/ X. A positive slope indicates that X and Y are directly related. A negative slope indicates that X and Y are inversely related. A zero or infinite slope indicates that X and Y are not related. © OnlineTexts.com p. 2

As X increases by 2, Y increases by 1. Slope is 1/2. Positive Slope As X increases by 2, Y increases by 1. Slope is 1/2. © OnlineTexts.com p. 3

As X increases by 3, Y decreases by 2. Slope is -2/3. Negative Slope As X increases by 3, Y decreases by 2. Slope is -2/3. © OnlineTexts.com p. 4

As X increases by 5, Y does not change. Slope is zero. No Slope As X increases by 5, Y does not change. Slope is zero. © OnlineTexts.com p. 5

X is unchanged as Y goes from 5 to 9. Slope is infinite. Infinite Slope X is unchanged as Y goes from 5 to 9. Slope is infinite. © OnlineTexts.com p. 6

Scarcity The science of economics is concerned with the rationing of scarce resources. Scarcity occurs when, at a zero price, quantity demanded is greater than quantity supplied. Nearly every good and service we think of is scarce. Water and air are not scarce (but clean water and air are scarce). © OnlineTexts.com p. 7

Opportunity Cost Opportunity cost is the value of the next best alternative that is given up. Because resources are limited, every decision we make means sacrificing some other option. Buying a Toyota, for example, means forgoing a Honda. Opportunity cost is not always the dollar cost of a particular choice. © OnlineTexts.com p. 8

Production Possibilities Frontier A Production Possibilities Frontier (PPF) represents all possible combinations of the production of two goods given the available resources and technology. Resources consist of labor--the human inputs into production, land--the gifts of nature such as water and oil, capital--the human-made inputs to production such as machines and tools. © OnlineTexts.com p. 9

Production Possibilities Frontier Points A, B, and C are efficient. Points F and G are unattain-able. Points D and E are inefficient. © OnlineTexts.com p. 10

Production Possibilities Frontier A movement from one point on the frontier to another point on the frontier, always results in an opportunity cost. The slope of the line represents the opportunity cost of increasing the X good by one unit. Any given point on the frontier is no better than any other point in terms of efficiency; points A, B and C all fully utilize resources. © OnlineTexts.com p. 11

Common Trade-offs Guns versus butter debate Gender equity in college sports Regulation/Approval of new drugs Crime prevention Medicare coverage of prescription drugs for the elderly © OnlineTexts.com p. 12

Principle of Increasing Costs The principle of increasing costs holds that as production of a good or service increases, the opportunity cost of producing another unit generally rises. Explains why does the production possibilities frontier bows outward. This principle holds because resources tend to be specialized so that some of their productivity is lost when they are transferred from what they do well to what they do poorly. © OnlineTexts.com p. 13

Principle of Increasing Costs The slope of the PPF increases with defense production. © OnlineTexts.com p. 14

PPF with no Resource Specialization The principle of increasing costs is not applicable here. © OnlineTexts.com p. 15

Economic Growth Economic Growth is the increase in the economy's level of production. Economic growth can occur because either the resource base expands or the level of technology increases. © OnlineTexts.com p. 16

Economic growth shifts the PPF outward. © OnlineTexts.com p. 17