1. Key Assumptions in Economics, Scarcity, Opportunity Cost and the Production Possibilities Curve

2. Key Assumptions in Economics
People are rationally self-interested (Adam Smith)
They seek to maximize their utility (happy points)
People generally make decisions at the margin
They weigh the marginal benefit against the marginal cost of a decision
Ceteris Paribus
Economists hold factors constant, NO “what ifs”; “but”; or “what abouts”.

3. Resources a.k.a. The Factors of Production – These MUST be present to produce!
Economists classify resources into 4 categories
Land
Natural resources
The payment for Land is RENT
Labor
Human resources
The payment for Labor is WAGES
Capital (a product of Investment)
Tools, machines, factories
The payment for Capital is INTEREST
Entrepreneurship
The special ability of risk-takers to combine land,
labor and capital in new ways in order to make profit
The payment for Entrepreneurship is PROFIT

4. Opportunity Cost
Once a decision has been made, an opportunity cost is incurred.
Opportunity cost is the next best alternative use for a resource. (choice)
Example? Student view?; parent view?; employee view? Business mgr view?
No matter what we do with our time or resources, we always incur opportunity cost. TINSTAAFL.

5. TINSTAAFL Illustrated: The PPC
The PPC = The Production Possibilities Curve
The PPC = a graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods.

6. TINSTAAFL Illustrated: The PPC

7. End for on level

8. Graph a new PPC 2008 question 3 FRQ……….collaborative quiz.

9. Question 3 6 points ( ) (a) 1 point: • One point is earned for stating that the opportunity cost of a bicycle in Artland is 600/300 = 2 hats. (b) 2 points: • One point is earned for stating that Rayland will import bicycles. • One point is earned for any one or more of the following explanations: Rayland has a comparative advantage in hats. Rayland has a comparative disadvantage in bicycles. Rayland has a lower opportunity cost in hats or higher opportunity cost in bicycles. Artland has a comparative advantage in bicycles. Artland has a comparative disadvantage in hats. Artland has a lower opportunity cost in bicycles or a higher opportunity cost in hats. (c) 2 points: • One point is earned for stating that it is advantageous for Artland. • One point is earned for stating that it is NOT advantageous for Rayland. (d) 1 point: • One point is earned for stating that Rayland has a comparative advantage in producing