1. Unit 1: Basic Economic Concepts

2. Quick Review Basic Economic Concepts
What is Scarcity? What is Shortage?
What is Specialization?
What is Marginal Utility?
What is Allocative Efficiency?
What is the Difference b/w Price & Cost?
What is Investment?
Differentiate b/w Positive & Normative
Give the Equation for Profit
Differentiate b/w Consumer & Capital Goods
Examples of Each of the 4 Factors of Production
Define Opportunity Cost
Differentiate b/w Accounting & Economic Costs
Name 10 Teachers/Faculty At 32nd STEAM

3. The Economizing Problem…
WE HAVE A PROBLEM!!
The Economizing Problem…
Scarcity
Society has unlimited wants but limited resources

4. Using Economic Models…
The Production Possibilities Curve/Frontier/Graph
Using Economic Models…
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph

5. What is the Production Possibilities Curve?
A production possibilities curve (PPC) is a model that shows alternative ways that an economy can use its scarce resources
This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.
4 Key Assumptions
Only 2 Goods Can Be Produced
Full Employment of Resources
Fixed Resources
Fixed Technology

6. Production PossibilitiesA B C D E
Pizzas 4 3 2 1
Calzones A B C D E
Pizzas 20 19 16 10
Robots 1 2 3 4
Pizzas
Pizzas A 20 16 12 8 4 B C A 4 3 2 1 B D C D E E
Calzones
Robots

7. Production PossibilitiesA B C D E
Pizzas 4 3 2 1
Calzones
List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
Constant Opportunity Cost: Resources are easily adaptable for producing either good.
Result is a straight line PPC (not common)
Pizzas A B C D E
Calzones

8. Production PossibilitiesA B C D E
Pizzas 20 19 16 10
Robots 1 2 3 4
Pizzas
List the Opportunity Cost of moving from a-b, b-c, c-d, & d-e.
Law of Increasing Opportunity Cost:
As you produce more of any good, the opportunity cost will increase.
Why? Resources are NOT easily adaptable to producing both goods.
Result is a Concave (bowed out) Production Possibilities Curve. A B C D E
Robots

9. Production “Possibilities” Table
Bike 14 12 9 5
Computer 2 4 6 8
Each point represents a specific combination of goods that can be produced given full employment of resources.
NOW GRAPH IT:
Put bikes on y-axis & computers on x-axis

10. Production Possibilities
How does the PPC graphically demonstrates scarcity, trade-offs, opportunity costs, & efficiency?
Impossible/Unattainable
(given current resources) G
Bikes A 14 12 10 8 6 4 2 B A B C D E
Bikes 14 12 9 5
Computers 2 4 6 8
Efficient
AE C D
Inefficient Unemployment E
Computers

11. Opportunity Cost The opportunity cost of moving from A to B is…
The opportunity cost of moving from B to D is…
The opportunity cost of moving from D to B is…
The opportunity cost of moving from F to C is…
What can you say about point G?
Computers
Bikes A B C D E 14 12 10 8 6 4 2
2 Bikes
7 Bikes G
4 Computers
0 Computers
Unattainable

12. How much each marginal unit costs
PER UNIT Opportunity Cost
Opportunity Cost
Units Gained
How much each marginal unit costs
The PER UNIT opportunity cost of moving from A to B is…
The PER UNIT opportunity cost of moving from B to C is…
The PER UNIT opportunity cost of moving from C to D is…
The PER UNIT opportunity cost of moving from D to E is…
Computers
Bikes A B C D E 14 12 10 8 6 4 2
1 Bike
1.5 (3/2) Bikes
2 Bikes
2.5 (5/2) Bikes
NOTICE: Increasing Opportunity Costs

13. Constant vs. Increasing Opportunity Cost
Identify which product would have a straight line PPC and which would be bowed out?
Cactus
Corn
Wheat
Watermelon

14. The Production Possibilities Curve & Efficiency

15. Two Types of Efficiency
Products are being produced in the least costly way.
Productive
Efficiency
This is any point ON the Production Possibilities Curve
The products being produced are the ones most desired by society.
Allocative
Efficiency
This optimal point on the PPC depends on the desires of society. 15

16. Productive and Allocative Efficiency
Which points are productively efficient?
Which are allocatively efficient?
Productively Efficient combinations are the curve A through E
Allocative Efficient combinations depend on the wants of society
What if this represents a country with no electricity? 16

17. Why two types of efficiency?
Is combination “A” efficient?
Yes and No.
It is productively efficient,
but it is not the combination society wants
Size 20 running shoes A
Size 10 running shoes

18. Shifting the Production Possibilities Curve

19. 4 Key Assumptions Revisited
Production Possibilities Curve
4 Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
Fixed Resources (4 Factors)
Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in Resource
2. Change in Technology
3. Change in Trade

20. Production Possibilities
What happens if there is an increase in population?
Robots
Robots
Pizzas
Pizzas

21. Production Possibilities
What if there is a technology improvement in pizza ovens
Robots
Robots
Pizzas
Pizzas 21

22. PPC Practice Draw a PPC showing changes for each of the following:
Pizza and Robots (3)
New robot making technology
Decrease in the demand for pizza
Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
Destruction of power plants leads to severe electricity shortage
Faster computer hardware
Many workers unemployed
Significant increases in education
Robots
Pizzas

23. New robot making technology
Question #1
New robot making technology Q
A shift only for Robots
Robots Q
Pizzas 23

24. Question #2 Decrease in the demand for pizza Q
The curve doesn’t shift!
A change in demand doesn’t shift the curve
Robots Q
Pizzas 24

25. Mad cow disease kills 85% of cows A shift inward only for Pizza
Question #3
Mad cow disease kills 85% of cows Q
A shift inward only for Pizza
Robots Q
Pizzas 25

26. Question #4
Destruction of power plants leads to severe electricity shortage Q
Decrease in resources decrease production possibilities for both
Capital Goods (Guns) Q
Consumer Goods (Butter) 26

27. Question #5 Faster computer hardware Q
Quality of a resource improves shifting the curve outward
Capital Goods (Guns) Q
Consumer Goods (Butter) 27

28. Question #6 Many workers unemployed Q The curve doesn’t shift!
Unemployment is just a point inside the curve
Capital Goods (Guns) Q
Consumer Goods (Butter) 28

29. Question #7 Significant increases in education Q
The quality of labor is improved. Curve shifts outward.
Capital Goods (Guns) Q
Consumer Goods (Butter) 29

30. Capital Goods and Future Growth
Countries that produce more capital goods will have more growth in the future.
Panama – Favors Consumer Goods
Mexico – Favors Capital Goods
Current
PPC
Future
PPC
Future
PPC
Capital Goods
Current
PPC
Capital Goods
Consumer goods
Consumer goods
Panama
Mexico

31. Production Possibilities
Paul Solman Video
Production Possibilities