1. The Economist as Scientist
Economists play two roles:
Scientists: try to explain the world
Policy advisors: try to improve it
In the first role, economists employ the scientific method: the dispassionate development and testing of theories about how the world works.

2. Assumptions & Models
Assumptions simplify the complex world, make it easier to understand.
Example: When studying international trade, we might assume the world consists of two countries and two goods.
Very unrealistic, but simplifies the problem and yields useful insights about the more complicated real world.
Economists use models to study economic issues. A model is a highly simplified representation of a more complicated reality.

3. PRODUCTION POSSIBILITIES
The boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology.
A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology.
The PPF is a valuable tool for illustrating the effects of scarcity and its consequences.

4. PRODUCTION POSSIBILITIES
Figure 3.1 shows the
PPF for bottled water and CDs.
Each point on the graph represents a column of the table.
The line through the points is the PPF.

5. PRODUCTION POSSIBILITIES
The PPF puts two features of production possibilities in sharp focus:
Attainable and unattainable combinations
Efficient and inefficient production

6. PRODUCTION POSSIBILITIES
We can produce at any point inside the PPF or on the frontier.
Points outside the PPF such as point G are unattainable.
The PPF separates attainable combinations from unattainable combinations.

7. PRODUCTION POSSIBILITIES
Efficient and Inefficient Production
Production efficiency
A situation in which we cannot produce more of one good or service without producing less of something else.
Figure 3.3 on the next slide illustrates the distinction between efficient and inefficient production.

8. OPPORTUNITY COST The Opportunity Cost of a Bottle of Water
The opportunity cost of a bottle of water is the decrease in the quantity of CDs divided by the increase in the number of bottles of water as we move along the PPF.

9. OPPORTUNITY COST
Moving from A to B, 1 bottle of water costs 1 CD.

10. OPPORTUNITY COST
Moving from B to C, 1 bottle of water costs 2 CDs.

11. OPPORTUNITY COST
Moving from C to D, 1 bottle of water costs 3 CDs.

12. OPPORTUNITY COST
Moving from D to E, 1 bottle of water costs 4 CDs.

13. 3.2 OPPORTUNITY COST
Moving from E to F, 1 bottle of water costs 5 CDs.

14. OPPORTUNITY COST Increasing Opportunity Cost
The opportunity cost of a bottle of water increases as more CD’S are produced.

15. Why the PPF Might Be Bow-Shaped
Mountain Bikes
Milk
As the economy shifts resources from milk to mountain bikes:
PPF becomes steeper
opp. cost of mountain bikes increases

16. Why the PPF Might Be Bow-Shaped
At A, opp. cost of mtn bikes is low. A
At point A, most workers are producing milk, even those that are better suited to building mountain bikes.
So, you do not have to give up much milk to get more bikes.
Milk
Mountain Bikes

17. Why the PPF Might Be Bow-Shaped
At B, opp. cost of mtn bikes is high.
At B, most workers are producing bikes. The few left in milk are the best milkers.
Producing more bikes would require shifting some of the best milkers away from milk production, which would cause a big drop in milk output.
Milk B
Mountain Bikes

18. The PPF and Opportunity Cost
–1000
The slope of a line equals the “rise over the run” – the amount the line rises when you move to the right by one unit.
slope =
= –10
100
Here, the opportunity cost of a computer is 10 tons of wheat.

19. The PPF and Opportunity Cost
Recall: The opportunity cost of an item is what must be given up to obtain that item.
Moving along a PPF involves shifting resources (e.g., labor) from the production of one good to the other.
Society faces a tradeoff: Getting more of one good requires sacrificing some of the other.
The slope of the PPF tells you the opportunity cost of one good in terms of the other.

20. The PPF: A Summary
The PPF shows all combinations of two goods that an economy can possibly produce, given its resources and technology.
The PPF illustrates the concepts of tradeoff and opportunity cost, efficiency and inefficiency, unemployment, and economic growth.
A bow-shaped PPF illustrates the concept of increasing opportunity cost.