Slide 1C H A P T E R C H E C K L I S T3.1 PRODUCTION POSSIBILITIESSlide 4Slide 6Slide 7Slide 8Slide 10Slide 11Slide 13Slide 143.2 OPPORTUNITY COSTSlide 17Slide 19Slide 21Slide 23Slide 25Slide 27Slide 28Slide 30Slide 32Slide 34Slide 36Slide 38Slide 39Slide 403.3 USING RESOURCES EFFICIENTLYSlide 42Slide 43Slide 44Slide 46Slide 48Slide 50Slide 52Slide 54Slide 55Slide 57Slide 59Slide 61Slide 63Slide 65Slide 67Slide 68Slide 70Slide 72Slide 743.4 SPECIALIZATION AND EXCHANGESlide 76Slide 78Slide 80Slide 82Slide 84Slide 86Slide 87When you have completed your study of this chapter, you will be able toC H A P T E R C H E C K L I S TUse the production possibilities frontier to illustrate the economic problem.1Calculate opportunity cost.Define efficiency and describe an efficient use of resources.Explain how people gain from specialization and trade.2343.1 PRODUCTION POSSIBILITIESProduction Possibilities FrontierProduction possibilities frontierThe boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology.The PPF is a valuable tool for illustrating the effects of scarcity and its consequences.Figure 3.1 shows thePPF for bottled water and CDs. Each point on the graph represents a column of the table.The line through the points is the PPF. 3.1 PRODUCTION POSSIBILITIES3.1 PRODUCTION POSSIBILITIESThe PPF puts three features of production possibilities in sharp focus: • Attainable and unattainable combinations• Full employment and unemployment• Tradeoffs and free lunches3.1 PRODUCTION POSSIBILITIESAttainable and Unattainable CombinationsBecause the PPF shows the limits to production, it separates attainable combinations from unattainable ones.Figure 3.2 on the next slide illustrates the attainable and unattainable combinations.The PPF separates attainable combinations from unattainable combinations.Points outside the PPF such as point G are unattainable.We can produce at any point inside the PPF or on the frontier.3.1 PRODUCTION POSSIBILITIES3.1 PRODUCTION POSSIBILITIESFull Employment and UnemploymentFull employment occurs when all the available factors of production are being used. Unemployment occurs when some factors of production are not used.Figure 3.3 on the next slide illustrates full employment and unemployment.1. When resources are fully employed, production occurs at points on the PPF such as D and E.2. When resources are unemployed, production occurs at a point inside the PPF such as point H.3.1 PRODUCTION POSSIBILITIES3.1 PRODUCTION POSSIBILITIESTradeoffs and Free LunchesTradeoffA constraint or limit to what is possible that forces an exchange or a substitution of one thing for something else.To emphasize that every choice involves a cost, economists say, “There is no such thing as a free lunch.”But there would be a free lunch—something for nothing—if we were not at a point on the PPF.1. When production is on the PPF, we face a tradeoff. There’s no free lunch.2. If production were inside the PPF, there would be a free lunch. We could get more of both goods without forgoing either good.3.1 PRODUCTION POSSIBILITIES3.2 OPPORTUNITY COSTThe Opportunity Cost of a Bottle of WaterThe opportunity cost of a bottle of water is the decrease in the quantity of CDs divided by the increase in the number of bottles of water as we move along the PPFFigure 3.5 illustrates the calculation of the opportunity cost of a bottle of water.Moving from A to B, 1 bottle of water costs 1 CD.3.2 OPPORTUNITY COSTMoving from B to C, 1 bottle of water costs 2 CDs.3.2 OPPORTUNITY COSTMoving from C to D, 1 bottle of water costs 3 CDs.3.2 OPPORTUNITY COSTMoving from D to E, 1 bottle of water costs 4 CDs.3.2 OPPORTUNITY COSTMoving from E to F, 1 bottle of water costs 5 CDs.3.2 OPPORTUNITY COST3.2 OPPORTUNITY COSTThe Opportunity Cost of a CDThe opportunity cost of a CD is the decrease in the quantity of bottles of water divided by the increase in the quantity of CDs as we move along the PPF.Figure 3.6 illustrates the calculation of the opportunity cost of a CD.Moving from F to E, the 1 CD costs 1/5 of a bottle of water.3.2 OPPORTUNITY COST3.2 OPPORTUNITY COSTMoving from E to D, the 1 CD costs 1/4 of a bottle of water.3.2 OPPORTUNITY COSTMoving from D to C, the 1 CD costs 1/3 of a bottle of water.3.2 OPPORTUNITY COSTMoving from C to B, the 1 CD costs 1/2 of a bottle of water.3.2 OPPORTUNITY COSTMoving from B to A, the 1 CD costs 1 of a bottle of water.3.2 OPPORTUNITY COSTOpportunity Cost Is a RatioThe opportunity cost of a bottle of water is the quantity of CDs forgone divided by the increase in the quantity of water. The opportunity cost of a CD is the quantity of bottled water forgone divided by the increase in the quantity of CDs.When the opportunity cost of a bottle of water is x CDs, the opportunity cost of a CD is 1/x bottles of water.3.2 OPPORTUNITY COSTIncreasing Opportunity CostThe opportunity cost of a bottle of water increases as the quantity of bottled water produced increases. The opportunity cost of a CD increases as the quantity of CDs produced increases. The shape of the PPF is bowed outward because opportunity cost increase.3.2 OPPORTUNITY COSTIncreasing Opportunity Costs Are EverywhereJust about every activity that you can think of is one with an increasing opportunity cost.3.3 USING RESOURCES EFFICIENTLYEfficiency A situation in which the quantities of goods and services produced are those that people value most highly.Resource use is efficient when we cannot produce more of a good or service without giving up some of another good or service that people value more highly.3.3 USING RESOURCES EFFICIENTLYTwo Conditions for Efficiency•Production efficiency•Allocative efficiencyProduction efficiencyA situation in which we cannot produce more of one good or service without producing less of some other good or service—production is at a point on the PPF.Allocative efficiencyThe combination of goods and services on the PPF that we value most highly.3.3 USING RESOURCES EFFICIENTLYMarginal BenefitThe benefit that a person receives from consuming one more unit of a good or service.Marginal Benefit Schedule and CurveThe marginal benefit from a bottle of water is the number of CDs that people are willing to forgo to get one more bottle of water. Marginal benefit decreases as more bottled water is available.Point A tells us that