1. Production and Trade
Production Possibilities, Comparative and Absolute Advantage, Specialization and Trade, Circular Flow, Invisible Hand

2. Scarcity forces us to ask the following questions…
WHAT to produce?
HOW to produce?
FOR WHOM to produce?

3. Imagine a scenario where…
…we take an all-expenses-paid class trip to…

4. Australia!

5. Our plane is forced to make a “water landing,” and we are able to swim to an uncharted island.
You are in charge. Prioritize 3-5 things we’ll have to do to survive and how (and with who) we should accomplish these tasks.

6. Specialization
Allocating resources toward production for which they are best suited.

7. FACTORS OF PRODUCTION Land – all gifts of nature
Labor – human efforts and abilities
Capital – tools, equipment, space
Human Capital – Skills or knowledge gained by a worker through education, training, or experience
Entrepreneurship – risk taking, ideas
**The “spark” or driving force of the economy**

8. I have an idea….
Am I an entrepreneur?

9. EXAMPLES: Durable vs. Nondurable goods
Durable – lasts more than 3 years
Nondurable – lasts less than 3 years

10. Adam Smith Meat Bread Candles How do we decide to provide these?
“Wealth of Nations”
1776
Invisible hand
Meat
Bread
Candles
How do we decide to provide these?

11. CIRCULAR FLOW

12. But Remember...

13. 5 Key Economic Assumptions
Society has unlimited wants and limited resources (scarcity).
Due to scarcity, choices must be made. Every choice has a cost (a trade-off).
Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.”
Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.
Real-life situations can be explained and analyzed through simplified models and graphs.
Copyright
ACDC Leadership 2015

14. 14
Copyright
ACDC Leadership 2015

15. Production Possibilities Model
Illustrate production choices
Assumptions:
Full employment
Fixed resources
Fixed technology
Two goods
1-15

16. Production Possibilities Frontier
All possible combinations of two products that can be produced when employing 100% of available resources.
Guns (thousands)
A 80
B 75
C 60
D 30
E 0
Butter (tons)
150
300
400
450
Let’s Graph it!

18. Production Possibilities Frontier
How could we get to point H in the future?
What does point H represent?
Why is the curve bowed out from the origin?
What do points F and G represent?
Law of Increasing
Opportunity Cost…
…due to the specialization of resources
Unattainable Production
Unemployed Resources
Economic Growth

19. Production Possibilities Table
Production Alternatives
Type of Product A B C D E
Pizzas
(in hundred thousands) 1 2 3 4
Industrial Robots
(in thousands) 10 9 7 4
Plot Points to Create Graph…
1-19

20. Quick Quiz Why is the PPF bowed out from the origin?
Law of increasing opportunity costs
What is the marginal opportunity cost of the 2nd unit of pizza?
2 units of robots
Which point(s) on the curve represent full employment of resources?
All points ON the curve

21. Production Possibilities CurveA’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’
Unattainable A
Economic
Growth B C’ C
Industrial Robots D’ D
Now Attainable
Attainable E E’
Pizzas
1-21

22. Production Possibilities CurveA’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’
Unattainable C’
Industrial Robots U D’
Under or
Unemployment E’
Pizzas
1-22

23. How do we know where on the curve we should be?
As long as the MARGINAL benefit of the next unit of a good exceeds the MARGINAL cost, we should continue to produce an additional unit of the good.
We should stop producing when the marginal benefit equals the marginal cost.

24. Optimal Allocation of ResourcesMC a c 15 10 5
MB = MC e
Marginal Benefit & Marginal Cost b d MB
**MB = Gains from additional pizza
MC = Costs of foregoing additional robot
Quantity of Pizza
1-24

25. The Future Economy Consequences of unemployment Economic growth
More resources
Better quality resources
Technological advances
1-25

26. Future Possibilities Compare Two Hypothetical Economies Presentville
Curve
Future
Curve F
Goods for the Future
Goods for the Future P
Current
Curve
Current
Curve
Goods for the Present
Goods for the Present
Presentville
Futureville
1-26

27. A Budget Line
$120 Budget 12 10 8 6 4 2
DVDs
$20
Books
$10 2 4 6 8 10 12 6 5 4 3 2 1
Income = $120
Pdvd = $20
= 6
Unattainable
Quantity of DVDs
Income = $120
Pb = $10
= 12
Attainable
Quantity of Paperback Books
1-27

28. Homework - Comparative Advantage
Read pgs and complete pg. 864 #2