1. The PPF: Position, Properties and Opportunity Costs Lecture 3 Dr. Jennifer P. Wissink ©2015 John M. Abowd and Jennifer P. Wissink, all rights reserved. September 1, 2015

2. Announcements (MACRO) Fall 2015 u Make sure you are reading class announcements on Blackboard. u Also, check out all the FAQs on Blackboard. u Get yourself set up on MEL ASAP. –Please make a habit of checking the calendar that shows up on MEL for when all the graded quizzes are due. –On menu in MEL click Assignments... click Do a Quiz.... look at top area and you will see the quiz and its due date. As I assign more quizzes more will show up. –NOTE: I have posted the first quiz that will count towards your magic number of 500 MEL points and it is due 09/08/15 at 10:00am. It is Quiz#01-1120-F2015. You can start and stop a quiz as many times as you want. Your work is automatically saved. When you are ready for your quiz to be graded hit "Submit". That turns/submits your quiz in for grading. You will see what you got right and wrong - make sure to take a screen shot of that if you want the information. After the quiz is past due you will be able to review it using Results. You can retake the entire quiz once. You must do the entire quiz again. And beware, the order of answers will change. So you really have to read and do it all over again. Submit when you are ready. The HIGHER of two quiz attempts will count towards your 500 goal. (NOT BOTH!) To see how many points you have use Results. u Get out your i>clicker or REEF Polling app going. –Register it via our Blackboard page, ASAP. u OFFICE HOURS NOTE for WISSINK: This week only Wissink’s Wednesday office hours will be from 11:45am-12:45pm.

3. i>clicker question Which one of the following would an economist classify as capital (K)? A. An entrepreneur's $100 bill. B. The guitars used by the members in the band Fun. C. A corporate bond issued by IBM. D. Unfinished lumber purchased by a furniture manufacturer to make chairs.

4. The PPF: What You Get u Typical teaching set-up: –Two final goods. »Guns (G) and Butter (B) –Two input goods and final goods technologies. »So drop “land” for now, no big deal. »Have Kapital (K) and Labor (L) that both go into making guns and butter according to some known and given technology that can be described by production functions. »G = g(K, L) and B = b(K, L) –PPF is a frontier that shows the maximum amount of one good you can produce given a fixed amount of the other. –Frontier is a graph.

5. GUNS KL Guns (tons) 200 211 222 233 244 255 Gun Production Data (Given) & The Gun Production Function

6. Butter Production Data (Given) & The Butter Production Function BUTTER KL Butter (lbs) 100 1121 1230 1337 1439 1540

7. Guns & Butter & The PPF GUNS KL Guns (tons) 200 211 222 233 244 255 BUTTER KL Butter (lbs) 100 1121 1230 1337 1439 1540 THE PPF Butter (lbs) Guns (tons)

8. The PPF Graphed THE PPF Butter (lbs) Guns (tons) 400 391 372 303 214 05

9. i>clicker question Which one of the following output combinations is the most efficient? A. The output combination at point A. B. The output combination at point B. C. The output combination at point C. D. The output combination at point D. E. None of the above.

10. The PPF & Its Properties u Its location depends on the endowment of resources, the time frame and the state of technologies and efficient production. u Its direction will typically be downward sloping. –WHY? »If you are efficient and at the frontier, you must give up “this” to get more of “that,” that is, there is a real cost! u Its curvature is typically “bowed-out” away from the origin [OR it’s a downward sloping straight line]. –WHY would it be “bowed-out”? »Heterogeneous factors of production »The law of diminishing marginal returns

11. The PPF: What It Tells Us & What is Does Not u What’s Feasible? u What’s Not? u What’s Efficient? u What’s Not? u What’s best? u What do guns cost us? u What does butter cost us?

12. Opportunity Cost u The opportunity cost of an activity is the value of the resources used in that activity when they are measured by what they would have produced when used in their next best alternative. u Total opportunity cost (TOC) u Marginal opportunity cost (MOC) u The slope of the PPF measures the marginal opportunity cost of producing one good in terms of the amount of the other good foregone.

13. The PPF: Measuring Opportunity Costs Butter lbs. Guns tons 400 391 372 303 214 05

14. The PPF, Its Slope & Increasing MOC

15. Increasing MOC: So Why The Bowed-Out PPF Curve? u Two-fold answer: –(1) Heterogeneous factors of production –(2) The “Law of Diminishing Marginal Returns” (LDMR): As you add more and more of a variable factor to some activity, in the presence of a fixed factor, the marginal contribution of the variable factor will eventually decline.

16. Checking For The LDMR: Look At Marginal Product u Consider the marginal productivity of labor in each technology. u Marginal productivity of labor=MP L = (change in output)/(change in labor)

17. Checking For The LDMR In Guns & Butter GUNS KLGunsMP 200 211 222 233 244 255 BUTTER KLButterMP 100 1121 1230 1337 1439 1540 production function for Guns production function for Butter