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:

10. Adam Smith “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 1. Society has unlimited wants and limited resources (scarcity). 2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off). 3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self- interest.” 4. Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice. 5. Real-life situations can be explained and analyzed through simplified models and graphs. Copyright ACDC Leadership 2015 13

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 Guns (thousands) 80 75 60 30 0 Butter (tons) 0 150 300 400 450 All possible combinations of two products that can be produced when employing 100% of available resources.

17. Production Possibilities Frontier

19. Type of Product Pizzas (in hundred thousands) Industrial Robots (in thousands) Production Alternatives ABCDE 109740 01234 Plot Points to Create Graph… Production Possibilities Table 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 2 nd 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 Curve Pizzas Industrial Robots Attainable 0 1 2 3 4 5 6 7 8 9 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C D E Economic Growth Now Attainable A’ B’ C’ D’ E’ 1-21

22. Production Possibilities Curve Pizzas Industrial Robots Attainable 0 1 2 3 4 5 6 7 8 9 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C D E Law of Increasing Opportunity Cost A’ B’ C’ D’ E’ Shape of the Curve 1-22

23. Production Possibilities Curve Pizzas Industrial Robots Under or Unemployment 0 1 2 3 4 5 6 7 8 9 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A’ B’ C’ D’ E’ U 1-23

24. 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.

25. Optimal Allocation of Resources 15 10 5 0 1 2 3 a b c d e MB = MC MC MB Quantity of Pizza Marginal Benefit & Marginal Cost 1-25

26. The Future Economy Consequences of unemployment Economic growth More resources Better quality resources Technological advances 1-26

27. Future Possibilities Goods for the Present Goods for the Future Goods for the Present P F Current Curve Current Curve Future Curve Future Curve Presentville Futureville 1-27

28. A Budget Line 65432106543210 0 2 4 6 8 10 12 DVDs $20 Books $10 12 10 8 6 4 2 0 2 4 6 8 10 12 14 $120 Budget Income = $120 P dvd = $20 = 6 Income = $120 P b = $10 = 12 Attainable Unattainable Quantity of Paperback Books Quantity of DVDs 1-28

29. Homework - Comparative Advantage Read pgs. 841-846 and complete pg. 864 #2