ECON 1051 1st Edition Lecture 3 Outline of Last Lecture II. Trade-off III. Opportunity Cost IV. Normative v. Positive Analysis V. Economy Types (Centrally Planned v. Market)VI. Microeconomics v. Macroeconomics Outline of Current Lecture I. Production Possibilities Frontier II. Examples III. Determining Opportunity Cost Current LectureI. Production Possibilities Frontier a. Definition i. A curving showing the maximum attainable combinations of two productsthat can be produced with available resources b. Points outside the production possibilities frontier curve: i. Unattainable c. Points inside the production possibilities frontier curve: i. Attainableii. Inefficient II. Example a. Rosie’s Boston Bakery specializes in cakes and pies. Rosie has 5 hours a day devoted to baking. In 1 hour, Rosie can prepare 2 pies or 1 cakeb. Given the above information, the table below represents the time she spent baking and what she was able to produce:These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Hours Spent Making Quantity MadeChoice Cakes Pies Cakes PiesA 5 0 5 0B 4 1 4 2C 3 2 3 4D 2 3 2 6E 1 4 1 8F 0 5 0 10c. Explanation of numbers: i. Since Rosie can make one cake in one hour the quantity she can make remains one cake to one hour. Since she can make two pies in one hour the quantity she can make is two pies for every one hour she devotes to making pies. d. This information is then used to make the production possibilities frontier graph: e. Explanation:i. Since Rosie devotes 5 hours to baking the most cakes she can make in those five hours (if all her time was devoted to making cakes) is 5 based on the information in the table above. If she were to devote all that time to making pies instead she is able to produce ten pies since she can make 2 pies in one hour. The production possibility frontier shows how many of 543210 2 4 6 8 10PiesCakeseach she could make depending on how much time she devotes to cakes and how much time she devotes to pies. III. Determining Opportunity Cost a. The opportunity cost is how much has to be given up of one thing (ex: cakes) to make more of something else (ex: pies)b. Examples: i. If of her 5 hours Rosie chooses to devote 2 hours to baking cake and 3 hours to baking pie she produces 2 cakes and 6 pies (reference table or PPF graph for these numbers). However if Rosie instead wants to bake one more cake, she must devote 3 hours to cake and 2 hours to pie, resulting in 3 cakes and 4 pies. The opportunity cost of baking one more cake in this situation is 2 pies. ii. In another situation, Rosie chooses to devote 4 hours to cake and 1 hour to pie. According to our chart, Rosie is able to bake 4 cakes and 2 pies. If she instead decides she wants to bake two more pies, the opportunity cost would be one
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