2. Review
1. Explain Scarcity.
2. Differentiate between positive and
normative.
3. Define opportunity cost.
4. What is a resource?
5. Name 10 different teachers at RWHS.
3. I. The Production Possibilities Frontier
(curve)
a) Illustration of the trade-offs facing an
economy that produces only two goods.
Shows the maximum quantity of one good
that can be produced for any given
production of the other.
4. The Production Possibility Frontier
2820 400
30
9
15
Quantity of coconuts
Production possibility frontier
A
B
D
C
Feasible and
efficient
in production
Not
feasible
PPF
Quantity of fish
Feasible
but
not efficient
5. Increasing Opportunity Cost
A
PPF
10 20 30 40 500
35
30
25
20
15
10
5
Producing the first
20 fish . . .
…requires giving up
25 more coconuts…
…requires giving up
5 coconuts
But producing
20 more fish . . .
Quantity of coconuts
Quantity of fish
6. Economic Growth
Economic growth results in
an outward shift of the PPF
because production
possibilities are expanded.
The economy can now
produce more of everything.
Production is initially at point A
(20 fish and 25 coconuts), it
can move to point E (25 fish
and 30 coconuts).
A
10 20 25 30 40 500
35
30
25
20
15
10
5
E
New
PPF
Original
PPF
Quantity of coconuts
Quantity of fish
7. 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. BP oil spill in the Gulf
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education
7
8. New robot making technology
Q
Q
Robots
Pizzas
Question #1
8
A shift only for Robots
9. Decrease in the demand for pizza
Q
Q
Robots
Pizzas
Question #2
9
The curve doesn’t shift!
A change in demand
doesn’t shift the curve
10. Mad cow disease kills 85% of cows
Q
Q
Robots
Pizzas
Question #3
10
A shift inward only for
Pizza
11. BP Oil Spill in the Gulf
Q
Q
CapitalGoods(Guns)
Consumer Goods (Butter)
Question #4
11
Decrease in resources
decrease production
possibilities for both
14. Significant increases in education
Q
Q
CapitalGoods(Guns)
Consumer Goods (Butter)
Question #7
14
The quality of labor is
improved. Curve shifts
outward.
15. Production Possibilities for Two Castaways
28 400
30
9
(a) Tom’s Production Possibilities
Tom’s consumption
without trade
Tom’s
PPF
Quantity of coconuts
Quantity of fish
16. Production Possibilities for Two Castaways
1060
20
8
Hank’s
PPF
Quantity of coconuts
Quantity of fish
(a) Hank’s Production Possibilities
Hank’s consumption
without trade
17. Tom and Hank’s Opportunity Costs
Tom’s
Opportunity
Cost
Hank’s
Opportunity
Cost
One fish 3/4 coconut 2 coconuts
One
coconut
4/3 fish 1/2 fish
18. Specialize and Trade
a) Both castaways are better off when they
each specialize in what they are good at and
trade.
19. Comparative Advantage and Gains from Trade
28 400
30
9
10
1060
20
8
10
(a) Tom’s Production and Consumption
Tom’s consumption
without trade
30
Tom's
PPF
Hank's
PPF
Quantity of coconuts Quantity of coconuts
Quantity of fishQuantity of fish
Tom’s consumption
with trade
Tom’s production
with trade
(b) Hank’s Production and Consumption
Hank’s production
with trade
Hank’s consumption
with trade
Hank’s consumption
without trade
20. How the Castaways Gain from Trade
Both Tom and Hank experience gains from trade:
1. Tom’s consumption of fish increases by two, and his
consumption of coconuts increases by one.
2. Hank’s consumption of fish increases by four, and his
consumption of coconuts increases by two.
21. II. Absolute vs. Comparative Advantage
a) Absolute advantage: greater total output. (ie.
Tom)
b) Hank has a comparative advantage in
coconut gathering (opportunity cost is lower
than Toms).
c) Tom can better use his time catching fish.
d) Comparative Advantage: Opportunity cost for
producing something is lower for one person
over the other.
22. III. The Circular-Flow Diagram
a) Model that represents the transactions in an
economy by flows around a circle.
24. Circular-Flow cont.
a) Household: a person or groups of people that
share their income.
b) Firm: Organization that produces goods and
services for sale.
c) Firms sell goods and services in the product
market.
d) Firms buy resources they need to produce in
the factor market.
Hinweis der Redaktion
Figure Caption:
Figure 2.1 - The Production Possibility Frontier
The production possibility frontier illustrates the trade-offs facing an economy that produces two goods. It shows the maximum quantity of one good that can be produced given the quantity of the other good produced. Here, the maximum quantity of coconuts that Tom can gather depends on the quantity of fish he catches, and vice versa. His feasible production is shown by the area inside or on the curve. Production at point C is feasible but not efficient. Points A and B are feasible and efficient in production, but point D is not feasible.
Figure Caption:
Figure 2.2 - Increasing Opportunity Cost
The bowed-out shape of the production possibility frontier reflects increasing opportunity cost. In this example, to produce the first 20 fish, Tom must give up 5 coconuts. But to produce an additional 20 fish, he must give up 25 more coconuts.
Figure 2.3 - Economic Growth
Economic growth results in an outward shift of the production possibility frontier because production possibilities are expanded. The economy can now produce more of everything. For example, if production is initially at point A (20 fish and 25 coconuts), it could move to point E (25 fish and 30 coconuts).
Figure Caption:
Figure 2.4 - Production Possibilities for Two Castaways
Here, each of the two castaways has a constant opportunity cost of fish and a straight-line production possibility frontier. In Tom’s case, each fish always has an opportunity cost of 3⁄4 of a coconut.
Figure Caption:
Figure 2.4 - Production Possibilities for Two Castaways
Here, each of the two castaways has a constant opportunity cost of fish and a straight-line production possibility frontier. In Hank’s case, each fish always has an opportunity cost of 2 coconuts.
Figure Caption:
Figure 2-5: Comparative Advantage and Gains from Trade By specializing and trading, the two castaways can produce
By specializing and trading, the two castaways can produce and consume more of both goods. Tom specializes in catching fish, his comparative advantage, and Hank— who has an absolute disadvantage in both goods but a comparative advantage in coconuts—specializes in gathering coconuts. The result is that each castaway can consume more of both goods than either could without trade.
Figure Caption:
Figure 2.7: The Circular-Flow Diagram
This diagram represents the flows of money and goods and services in the economy. In the markets for goods and services, households purchase goods and services from firms, generating a flow of money to the firms and a flow of goods and services to the households. The money flows back to households as firms purchase factors of production from the households in factor markets.
