1. Learning Objectives Explain the fundamental economic problem
Define the production possibility frontier
Define and calculate opportunity cost
Explain the conditions in which resources are used efficiently.

2. Learning Objectives (cont.)
Explain how economic growth expands production possibilities
Explain how specialization and trade expand production possibilities

3. Learning Objectives Explain the fundamental economic problem
Define the production possibility frontier
Define and calculate opportunity cost
Explain the conditions in which resources are used efficiently.

4. Resources and Wants
Our wants for goods and services exceed the productive capacity of the resources used to produce these goods and services.

5. Limited Resources
The resources that are used to produce goods and services are:
Labor
Land
Capital
Entrepreneurship

6. Limited Resources Labor Land
The time and effort that we devote to producing goods and services.
Land
The gifts of nature that we use to produce goods and services.

7. Limited Resources Capital
The goods we use to produce other goods and services.
Includes physical capital
interstate highways, buildings, and dams
and human capital
the knowledge and skill that people obtain from education and on-the-job training

8. Limited Resources Entrepreneurship
The resource that organizes labor, land, and capital.

9. Unlimited Wants Our wants are unlimited.
Humans, by nature, would like to have more of those things they find desirable.

10. Resources and Wants We have limited resources.
We have unlimited wants.
This leads to scarcity.
Scarcity exists when there are insufficient resources to satisfy people’s wants.

11. Economics
Economics is the study of the choices people make to deal with scarcity.

12. Learning Objectives Explain the fundamental economic problem
Define the production possibility frontier
Define and calculate opportunity cost
Explain the conditions in which resources are used efficiently.

13. Resources, Production Possibilities, and Opportunity Cost
The production possibilities frontier is used to illustrate the maximum quantity of two goods that can be produced due to scarcity.

14. A Typical PPF Picture Butter Guns
The marginal opportunity cost of guns in terms of butter is increasing as we move down the PPF!
The PPF is typically bowed-out or linear.
It is not bowed-in
unattainable
just attainable
Butter
inefficient
just attainable
Guns

16. Production Possibilities Frontier
Possiblity
Guns Butter
Hundreds Thousand’s Tons
a 0 and 15
b 1 and 14
c 2 and 12
d 3 and 9
e 4 and 5
f 5 and 0

17. Production Possibility Frontiera b d c f e 15
Attainable
Unattainable 10
Butter 5 z
Guns

18. Learning Objectives Explain the fundamental economic problem
Define the production possibility frontier
Define and calculate opportunity cost
Explain the conditions in which resources are used efficiently.

19. Opportunity Costs Production Efficiency Tradeoff
Production efficiency is achieved if we cannot produce more of one good without producing less of some other good.
Tradeoff
Tradeoffs exist when we must give up something to get something else.

20. Opportunity Costs Opportunity Cost
All tradeoffs involve a cost — an opportunity cost.

21. Opportunity Costs
The opportunity cost of an action is the highest valued alternative foregone, or the next best alternative.
Opportunity costs increase as we desire to produce more guns.
This explains the shape of the PPF — it is bowed outward.

22. Opportunity Costs Opportunity Cost Is a Ratio
The decrease in the quantity produced of one good divided by the increase in the quantity of another good.
Increasing Opportunity Cost
Opportunity costs tend to increase because not all resources are equally productive in all activities.

23. Using Resources Efficiently
Marginal cost
The opportunity cost of producing one more unit of a good or service.
The marginal cost of an additional gun is the quantity of butter that must be given up to get one more gun — the opportunity cost.

24. Opportunity Cost and Marginal Cost
Increasing
opportunity
cost of butter…
means the marginal
costs of guns goes up a b c d e f 15 10
Butter 5
Guns

25. Marginal Benefit Marginal benefit Decreasing Marginal Benefit
The benefit that a person receives from consuming one more unit of a good or service.
It is measured as the maximum amount that a person is willing to pay for one more unit.
Decreasing Marginal Benefit
The more we have of any one good or service, the smaller is our marginal benefit.

26. Learning Objectives Explain the fundamental economic problem
Define the production possibility frontier
Define and calculate opportunity cost
Explain the conditions in which resources are used efficiently.

27. Efficient Use of Resources
Efficiency
Implies that we cannot produce any more of any good without giving up something that we value even more highly.
We compare the marginal cost to the marginal benefit.

28. Efficient Use of Resources
If the marginal benefit of the last unit of a good exceeds its marginal cost, we increase production of that good.
If the marginal cost of the last unit of a good exceeds its marginal benefit, we decrease production of that good.

29. The End