Transcript AP Economics

REVIEW
1.
2.
3.
4.
5.
Explain relationship between scarcity and choices
Differentiate between consumer and capital goods
Define tradeoffs
Define opportunity cost
Differentiate between accounting costs and
economic costs
1
You must make yourself
worse off in the short run
to make yourself better
off in the long run.
Study
Leisure
Peanuts
Oranges
Capital
Goods
Consumption
Goods
Gilligan’s Theme Song on YouTube.com
http://www.bradyworld.com/cover/minnow.jpg
The ship set ground on the shore of this
uncharted desert isle
http://images.google.com/imgres?imgurl=www.timvp.com/gillign2.jpg&imgrefurl=
http://www.timvp.com/gilligan.html&h=270&w=295&prev=/images%3Fq%3Dgilligan%2527s%2Bisland%
26svnum%3D10%26hl%3Den%26lr%3D%26ie%3DUTF-8%26oe%3DUTF-8
http://www.coracle-fishing.net/corac-pix2/net-11x.jpg
http://www.tasaday.com/images/_sl-003.jpg
http://www.surfingforlife.com/g/cult_b10.jpg
http://www.zeroimpactproductions.com/seine-over-freezer.jpg
http://www.riveroflifefarm.com/images/lodging/th/th2/tree-house-summer.jpg
Capital
Goods
By producing more capital goods
Consumption
relative to consumption goods,
Goods
the economy’s Production-possibilites
curve to shifts OUTWARD and shifts outward FASTER.
Capital
This is GOOD!
Consumption
If the PP shifts outward
Capital
This is BAD!!
Consumption
If the PP shifts inward
Capital
Goods
There are five variables that
shift the PP outward--
Consumption
Goods
Five Variables that Shift the PP Outward:
1. Increase the productive labor force
(productivity).
2. Increase the quantity and quality of natural
resources.
3. Increase the quantity and quality of capital.
4. Increase health and education.
5. Increase technology.
Historical Examples
• Women entering the workforce in mass in
the decades after WWII…
• Baby boom generation reaching working
age between 1960 and 1970….
• And…
What did Japan do on
December 7, 1941 ?
Capital
Japan 1941
What capital
goods
did Japan
produce
in 1940?
rice
Consumption
What consumption
goods did it produce?
What did the U.S. do to
Japan for this dirty deed?
Capital
Japan 1945
rice
Consumption
http://www.archives.gov/digital_classroom/history_day/bright_ideas/images/nagasaki.gif
morning of August 6, 1945
Nagasaki
http://www.nhc.rtp.nc.us:8080/tserve/nattrans/ntimages/hiroshima.jpg
Hiroshima
11:02 am, August 9, 1945
Capital
What do you think happened
to Japan’s productive labor
force?
Japan 1945
rice
Consumption
Capital
What do you think happened
to the quantity and quality of its
natural resources?
Japan 1945
rice
Consumption
Capital
What do you think happened to
the quantity and quality of
its capital stock?
Japan 1945
rice
Consumption
Capital
What do you think happened to
its health and education?
Japan 1945
rice
Consumption
http://hiroshima.tomato.nu/image/park_ma/e11-10.jpg
Capital
What do you think happened to
its technology?
Japan 1945
rice
Consumption
Capital
What happened to Japan’s
PP?
Japan 1945
rice
Consumption
Capital
Goods
Consumption
Goods
Guns
Military
Butter
Consumption goods
WE HAVE A PROBLEM!!
The Economizing Problem…
Scarcity
Society has unlimited wants but limited resources
35
Review
• What are the 5 changes that can shift the PP
Curve?
• How does the PP Curve relate to
opportunity cost?
36
What is the Production Possibilities Curve?
• A production possibilities graph (PPG) 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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Production “Possibilities” Table
Bikes
Computers
A
14
0
B
12
2
C
9
4
D
5
6
E
0
8
f
0
10
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 and
computers on x-axis
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Production Possibilities
How does the PPG graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency?
Impossible/Unattainable
14
(given current resources)
A
B
12
Bikes
G
C
10
8
Efficient
D
6
Inefficient/
Unemployment
4
2
E
0
0
2
4
6
8
10
Computers
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Opportunity Cost
Example:
1. The opportunity cost of
moving from a to b is… 2 Bikes
2.The opportunity cost of
moving from b to d is… 7 Bikes
3.The opportunity cost of
moving from d to b is… 4 Computer
4.The opportunity cost of
moving from f to c is… 0 Computers
5.What can you say about point G?
Unattainable
40
The Production Possibilities
Curve (or Frontier)
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Production Possibilities
CALZONES
PIZZA
A
B
C
D
E
4
0
3
1
2
2
1
3
0
4
• 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)
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Production Possibilities
PIZZA
ROBOTS
A
B
C
D
E
20
0
19
1
16
2
10
3
0
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
Constant vs. Increasing
Opportunity Cost
Identify which product would have a straight line
PPC and which would be bowed out?
Corn
Cactus
Wheat
Pineapples
The Production Possibilities
Curve and Efficiency
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Two Types of Efficiency
Productive Efficiency• Products are being produced in the
least costly way.
• This is any point ON the Production
Possibilities Curve
Allocative Efficiency• The products being produced are the
ones most desired by society.
• This optimal point on the PPC depends
on the desires of society.
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Productive and Allocative Efficiency
Which points are productively efficient?
Which are allocatively efficient?
14
A
B
12
Bikes
Productively Efficient
combinations are A through D
G
Allocative Efficient
combinations depend on
the wants of society
10
8
C
E
6
(What if this represents a
country with no electricity?)
4
F
2
D
0
0
2
4
6
8
10
Computers
47
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
Shifting the Production
Possibilities Curve
49
Robots
Production Possibilities
What happens if
there is an increase
in population?
Pizzas
51
Robots
Production Possibilities
What happens if
there is an increase
in population?
Pizzas
52
Production Possibilities
Robots
What if there is a
technology improvement
in pizza ovens
Pizzas
53
Production Possibilities
Robots
What if there is a
technology improvement
in pizza ovens
Pizzas
54
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
Future
PPC
Consumer goods
Panama
Future
PPC
Capital Goods
Capital Goods
Current
PPC
Current
PPC
Consumer goods
Mexico
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PPC Practice
Draw a PPC showing changes for each of the
following:
Pizza and Robots (3)
1. New robot making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
4. Destruction of power plants leads to severe
electricity shortage
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education
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Question #1
New robot making technology
Q
Robots
A shift only for Robots
Q
Pizzas
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Question #2
Decrease in the demand for pizza
Robots
Q
The curve doesn’t shift!
A change in demand
doesn’t shift the curve
Q
Pizzas
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Question #3
Mad cow disease kills 85% of cows
Robots
Q
A shift inward only for
Pizza
Q
Pizzas
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Question #4
BP Oil Spill in the Gulf
Capital Goods (Guns)
Q
Decrease in resources
decrease production
possibilities for both
Q
Consumer Goods (Butter)
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Question #5
Faster computer hardware
Capital Goods (Guns)
Q
Quality of a resource
improves shifting the
curve outward
Q
Consumer Goods (Butter)
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Question #6
Many workers unemployed
Capital Goods (Guns)
Q
The curve doesn’t shift!
Unemployment is just a
point inside the curve
Q
Consumer Goods (Butter)
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Question #7
Significant increases in education
Capital Goods (Guns)
Q
The quality of labor is
improved. Curve shifts
outward.
Q
Consumer Goods (Butter)
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