Review 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 Class

Production Possibilities Curves

Introduction Production Possibilities Curve: A Graph that shows all the different ways a business or nation can use it’s resources.

Introduction In order to graph a production possibilities curve, you first need to have a production possibilities table/schedule.

Let’s Walk Through an Example Let’s suppose we own a restaurant that only makes two products, pizza and calzone.

Example 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.

Example Let’s assume that through our research, we can choose to produce at any point on the chart below:

Example-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!

Using PPC to Figure Out Opportunity 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!

Using PPC to Figure Out Opportunity 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 Opportunity 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 Opportunity Cost A Butter Guns B C D E F 12 3 pound of butter McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPC 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!

PPC Let’s graph it on the sideboard.

Law of Increasing Marginal Opportunity 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 Opportunity 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 Opportunity Cost Example: A B C D E PIZZA ROBOTS List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e and graph the chart…

Efficiency and Inefficiency Guns Butter CD A B Efficient points Inefficient point Unattainable point, given available technology, resources and labor force

Tom’s Trade-offs: The Production Possibility Frontier

Shifts in the Production Possibility Curve Society can produce more output if: Technology is improved. More resources are discovered. Population increase.

Examples of Shifts in the Production 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.