Daily: What are the costs and benefits of having a part time job? A.P Microeconomics Daily: What are the costs and benefits of having a part time job?

Production Possibilities Frontier Economic Model: a graph or illustration used by economists to explain terms and theories. The PPF will show us different combinations of items to be produced when all resources are fully employed.

The Bieron Corporation Apple Pies Comps A 900 B 800 20 C 600 40 D 300 60 E 70 A 900 B 800 Apple Pies This model shows the different combinations of apple pies and computers the Bieron Corporation can make on any given day. At most _____ apple pies can be made and at most ______ computers can be made. 700 C 600 500 Full Efficiency 400 900 D 300 70 200 100 E 10 20 30 40 50 60 70 Computers

The Bieron Corporation 100 apple pies are sacrificed, for some resources are moved to computers At point A this economy is producing 900 apple pies; however the advisors suggest reallocating some resources into making computers. It is recommended to begin production of computers with 20 per production cycle. By choosing 20 computers what is given up? A 900 B 800 Apple Pies 700 C 600 500 400 D 300 200 100 E 10 20 30 40 50 60 70 Computers

The Bieron Corporation Is the trade off worth the opportunity cost? What information would be needed to answer this question? A 900 B 800 Apple Pies 700 C 600 Cost of production as well as price sold at, where can the Bieron Corp maximize profits! 500 400 D 300 200 100 E 10 20 30 40 50 60 70 Computers

The Bieron Corporation In order to increase to 600 pies from 300, 20 computers must be sacrificed. This economy is producing at point D, what is the opportunity cost of moving production to point C? A 900 B 800 Apple Pies 700 C 600 500 400 D 300 200 100 E 10 20 30 40 50 60 70 Computers

The Bieron Corporation At this production period could 800 apple pies and 60 computers be produced? Explain. A 900 B 800 Apple Pies 700 Not currently, this is outside of current capabilities. Can be possible with more resources (expansion)!! C 600 500 400 D 300 200 100 E 10 20 30 40 50 60 70 Computers

The Bieron Corporation At this production period could 300 apple pies and 30 computers be produced? What is wrong with this production point? A 900 B 800 Apple Pies 700 C 600 Yes, possible; but below this firm’s full potential. Some resources are being wasted. 500 400 D 300 200 100 E 10 20 30 40 50 60 70 Computers

Production Possibilities Frontier The Production Possibilities Frontier (PPF) is a curve showing all alternative combinations of goods that can be produced when available resources are used fully and efficiently (a.k.a. PPC, curve). Efficiency exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another good.

The Bieron Corporation 900 B 800 Apple Pies 700 Full Efficiency C 600 500 Beneath the line is NOT EFFICIENT! If I can increase computers and not have to sacrifice any apple pies, then resources are being wasted. 400 D 300 200 100 E 10 20 30 40 50 60 70 Computers

Assumptions Used in Constructing a Production Possibilities Frontier: Two Goods: For instance, assume that there are only apple pies and computers available in the economy. This allows us to analyze the tradeoffs between goods. Common Resources: This assumption is that the same resources can be used to produce either of the two goods. Fixed Technology: Given full employment, this assumption is to rules out the possibility of increasing the output of one good without decreasing the output of another good, which is usually the case in the short run. In other words, it is not possibly to get more of one good without giving up some of another good. Fixed Resources: This assumption rules out an increase in output from the discovery of additional resources.

When we will use the ppf: Individual Choices Resource - $$ Do I spend all my money on the Movies or all on dinner? Or Some combination of both? Movies Dinner

When we will use the ppf: Individual Choices Resource - Time Do I spend all my time working Or all my time playing? Or, Some combination of both? Work Play

When we will use the ppf: Firm’s Choices Resource - Factors Should we focus our resources On manufacturing only mud, or Manufacturing only water, or Some combination of both? Mud We will talk About why This line Should be Curved and Not straight!! Bottled Water

When we will use the ppf: National Choices Resource - $$ Presidents have Struggled with this Dilemma greatly! For example, LBJ Couldn’t afford his Great Society due to The Vietnam War!! Should more of the national Budget be devoted to domestic Programs or foreign affairs? GUNS VS. BUTTER Domestic Spending BUTTER Foreign Spending GUNS

AP Microeconomics Daily: What does a firm have to do to produce beyond its full potential?  Is this always a safe decision?  Explain. After answering question, open your ppf note packet from last class, draw the curve for the consumer goods and capital goods and answer the 4 questions that follow.

Making Choices One of the most important concepts in using a ppf is CHOICE. Since economics is the science of choices, we have to reflect back to trade-offs and opportunity costs. Trade off studies the choices we make when faced with decisions and opportunity costs are the sacrifices made when a decision is made, what was given up.

This is an important principle!!! Practice Problem Consumer Goods 1 2 3 4 Capital Goods 60 55 45 30 What is the cost to obtain 1 additional consumer good when there are 60 units of capital goods? 1 additional unit of consumer goods where there are 55 united of capital goods? What is the cost to obtain 15 additional capital goods when there are 3 units of consumer goods? Is it possible to produce 50 units of capital goods and 4 units of consumer goods? Notice with these two problems, both are showing the choice of one more unit of consumer goods, but the second one has a greater opportunity cost (10 cap. gds.)!! This is an important principle!!! No, not enough resources!!

When does the production possibilities curve shift? Increase the supply of resources: migration, new oil reserves, better capital goods. Improve the technology: the discovery of more efficient means of production shifts the frontier outward. Select an allocation of goods that has capital accumulation: some consumption must be given up today so that more capital goods can be produced.

Even Expansion

Even Expansion

The Law of Increasing Opportunity Costs The negative slope of the ppf indicates the tradeoff that a society faces between two goods; the ppf can show that some trade-offs have a higher opportunity cost than others. As we reallocate resources from one output to another, efficiency may be sacrificed.

The Law of Increasing Opportunity Costs

Straight vs. Curved PPF Straight: if the resources can be reallocated without any loss of efficiency, the line has one slope ($$ for movies or dinner) Curved: if the resources are not perfectly transferrable then there will be some losses when the output decision is changed (apple pies to computers)

Practicing with the PPF Agricultural Goods 2 4 6 8 Non-Agricultural Goods 50 45 35 20 What is the opportunity cost to obtain 2 additional units of agricultural goods where there are 50 units of non-agricultural goods? What is the opportunity cost to obtain 2 additional units of agricultural goods where there are 45 units of non-agricultural goods? What is the opportunity cost to obtain 2 additional units of agricultural goods where there are 20 units of non-agricultural goods? Does this curve show the law of increasing opportunity costs? Explain. Will this PPF be straight or curved? Explain.