accountants vs. economists accountants look at only explicit costs. explicit costs are the...
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The Production Possibilities Curve (PPC) 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 3TRANSCRIPT
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Accountants vs. EconomistsAccountants look at only EXPLICIT COSTS.•Explicit costs are the traditional “out-of pocket costs” of decision making.• Ex: Going to Disneyland
Economists look at the EXPLICIT COSTS and the IMPLICIT COSTS.•Implicit costs are the opportunity costs such as forgone time and forgone income.• Ex: Payton Manning leaves the NFL to open a
taco shop. 1
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Society has unlimited wants but unlimited resources
The Economizing Problem…Scarcity
WE HAVE A PROBLEM!!
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The Production Possibilities Curve
(PPC)Using Economic Models…
Step 1: Explain concept in wordsStep 2: Use numbers as examplesStep 3: Generate graphs from numbersStep 4: Make generalizations using graph
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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 two goods can be produced • Full employment of resources• Fixed Resources (Ceteris Paribus)• Fixed Technology
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a b c d e f14 12 9 5 0 00 2 4 6 8 10
BikesComputers
NOW GRAPH IT: Put bikes on y-axis and computers on x-axis
Production “Possibilities” Table
Each point represents a specific combination of goods that can be
produced given full employment of resources.
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Bik
es
Computers
14
12
10
8
6
4
2
00 2 4 6 8 10
A
B
C
D
E
G
Inefficient/ Unemployment
Impossible/Unattainable (given current resources)
Efficient
Production PossibilitiesHow does the PPG graphically demonstrates scarcity, trade-
offs, opportunity costs, and efficiency?
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2 Bikes2.The opportunity cost of moving from b to d is…
4.The opportunity cost of moving from f to c is…
3.The opportunity cost of moving from d to b is…
7 Bikes
4 Computer
0 Computers
5.What can you say about point G?Unattainable
1. The opportunity cost of moving from a to b is…
Example:
Opportunity Cost
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The Production Possibilities Curve (or Frontier)
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PIZZA 0 1 2 3 4CALZONES 4 3 2 1 0
• 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)
Production PossibilitiesA B C D E
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PIZZA 20 19 16 10 0ROBOTS 0 1 2 3 4
• List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
• Law of Increasing Opportunity Cost-• As you produce more of any good, the
opportunity cost (forgone production of another good) will increase.
• Why? Resources are NOT easily adaptable to producing both goods.
• Result is a bowed out (Concave) PPC
A B C D EProduction Possibilities
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Constant vs. Increasing Opportunity Cost
Corn
Wheat
Cactus
Pineapples
Identify which product would have a straight line PPC and which would be bowed out?
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1 Bike2.The PER UNIT opportunity cost of moving from b to c is…
4.The PER UNIT opportunity cost of moving from d to e is…
3.The PER UNIT opportunity cost of moving from c to d is…
1.5 (3/2) Bikes
2 Bikes
2.5 (5/2) Bikes
= Opportunity CostUnits Gained
1. The PER UNIT opportunity cost of moving from a to b is…
Example:
PER UNIT Opportunity CostHow much each marginal unit costs
NOTICE: Increasing Opportunity Costs 12
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The Production Possibilities Curve and Efficiency
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Productive Efficiency- • Products are being produced in the least
costly way. • This is any point ON the Production
Possibilities CurveAllocative Efficiency-
• The products being produced are the ones most desired by society.
• This optimal point on the PPC depends on the desires of society.
Two Types of Efficiency
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Productive and Allocative EfficiencyB
ikes
Computers
14
12
10
8
6
4
2
00 2 4 6 8 10
A
B
C
D
F
E
Which points are productively efficient?Which are allocatively efficient?
G
15
Productively Efficient combinations are A through D
Allocative Efficient combinations depend on
the wants of society (What if this represents a
country with no electricity?)
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Why two types of efficiency?
Size 20 running shoes
Size 10 running shoes
A
Is combination “A” efficient?Yes and No. It is productively efficient but it is not the
combination society wants
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Shifting the Production Possibilities Curve
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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 quantity or quality
2. Change in Technology3. Change in Trade 18
Production Possibilities
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Rob
ots
Pizzas
What happens if there is an increase
in population?
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Production Possibilities
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Rob
ots
Pizzas
What happens if there is an increase
in population?
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Production Possibilities
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Rob
ots
Pizzas
What if there is a technology improvement
in pizza ovens
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Production Possibilities
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Rob
ots
Pizzas
What if there is a technology improvement
in pizza ovens
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Production Possibilities
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Panama – Favors Consumer Goods
Mexico – Favors Capital Goods
Consumer goods
Capi
tal G
oods
Current PPC
Future PPC
Consumer goods
Capi
tal G
oods
Future PPC
Current PPC
Capital Goods and Future Growth
MexicoPanama23
Countries that produce more capital goods will have more growth in the future.
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PPC PracticeDraw a PPC showing changes for each of the
following:Pizza and Robots (3)
1. New robot making technology2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4) 4. BP Oil Spill in the Gulf 5. Faster computer hardware 6. Many workers unemployed 7. Significant increases in education
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New robot making technologyQ
Q
Rob
ots
Pizzas
Question #1
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A shift only for Robots
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Decrease in the demand for pizzaQ
Q
Rob
ots
Pizzas
Question #2
26
The curve doesn’t shift!A change in demand
doesn’t shift the curve
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Mad cow disease kills 85% of cowsQ
Q
Rob
ots
Pizzas
Question #3
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A shift inward only for Pizza
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BP Oil Spill in the GulfQ
QCap
ital G
oods
(Gun
s)
Consumer Goods (Butter)
Question #4
28
Decrease in resources decrease production possibilities for both
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Faster computer hardwareQ
QCap
ital G
oods
(Gun
s)
Consumer Goods (Butter)
Question #5
29
Quality of a resource improves shifting the
curve outward
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Many workers unemployedQ
QCap
ital G
oods
(Gun
s)
Consumer Goods (Butter)
Question #6
30
The curve doesn’t shift!Unemployment is just a point inside the curve
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Significant increases in educationQ
QCap
ital G
oods
(Gun
s)
Consumer Goods (Butter)
Question #7
31
The quality of labor is improved. Curve shifts
outward.