Concept of Opportunity CostOpportunity Cost and SocietyProduction Possibilities Frontiers (PPF)Figure 1: The Production Possibilities FrontierIncreasing Opportunity CostThe Search for a Free LunchIn recessionsRecessionsFigure 2: Production and UnemploymentEconomic GrowthSlide 11The Effect of a New Medical TechnologySlide 13Specialization and ExchangeSlide 15Further Gains to SpecializationSpecialization in PerspectiveExample:Comparative AdvantageCA in fishingCASlide 22Slide 23Slide 24CA and Resource allocationLook at it in the Broader Context of CountriesResource AllocationThe Three Methods of Resources AllocationThe Nature of MarketsThe Importance of PricesResource Allocation in the United StatesResource OwnershipTypes of Economic SystemsSlide 34Concept of Opportunity Cost•Opportunity cost of any choice –What we forego when we make that choice•Most accurate and complete concept of cost•Direct money cost of a choice may only be a part of opportunity cost of that choice•Opportunity cost of a choice includes both explicit costs and implicit costs–Explicit cost—dollars actually paid out for a choice–Implicit cost—value of something sacrificed when no direct payment is madeOpportunity Cost and Society•All production carries an opportunity cost–To produce more of one thing•Must shift resources away from producing something elseProduction Possibilities Frontiers (PPF)•Curve showing all combinations of two goods that can be produced with resources and technology available•Society’s choices are limited to points on or inside the PPFFigure 1: The Production Possibilities FrontierNumber of Lives Saved per PeriodQuantity of All Other Goods per Period100,000 200,000 300,000 400,000 500,0001,000,000950,000850,000700,000500,000400,000BACDEFWAt point A, all resources are used for "other goods."Moving from point A to point B requires shifting resources out of other goods and into health care.At point F. all resources are used for health care.Increasing Opportunity Cost•According to law of increasing opportunity cost–The more of something we producethe greater the opportunity cost of producing even more of it•This principle applies to all of society’s production choices •What the slope measures? Can you connect your mathematical idea with an economic concept?The Search for a Free Lunch•Productive Inefficiency of a firm or an industry or an entire economy:–more of at least one good can be produced Without pulling resources from the production of any other good•No industry, firm or economy is ever 100% productively efficient–any waste of resources increases the cost of a firm and therefore decrease their profit.In recessions•A slowdown in overall economic activity when resources are idle–widespread unemployment–factories shut down •Natural resources and capital are not being used fully •An end to the recession would move the economy from a point inside its PPF to a point on its PPF–Using idle resources to produce more goods and services without sacrificing anything•Can help us understand an otherwise confusing episode in U.S. economic historyRecessions•During early 1940s, standard of living in U.S. did not decline as we might have expected but actually improved slightly. Why? –U.S. entered World War II and began using massive amounts of resources to produce military goods and services•Instead of pitting “health care” against “all other goods,” we look at society’s choice between military goods and civilian goods•U.S. was still suffering from the Great Depression when it entered WWII•Joining war effort helped end the Depression and moved economy from a point like A, inside the PPF, to a point like B, on the frontier–Military production increased, but so did the production of civilian goods–Although there were shortages of some consumer goods»Overall result was a rise in the material well-being of the average U.S. citizen–War is only one factor that can reverse a downturn–No rational nation would ever choose war as an economic policy designed to cure a recession»Alternative policies that virtually everyone would find preferableFigure 2: Production and UnemploymentABCivilian Goods per PeriodMilitary Goods per Period2. then moved to the PPF during the war. Both military and civilian production increased.1. Before WWII the United States operated inside its PPF . . .Economic Growth•If economy is already operating on its PPF–Cannot exploit opportunity to have more of everything by moving to it•But what if the PPF itself were to change? Couldn’t we then produce more of everything? –This happens when an economy’s productive capacity grows•Many factors contribute to economic growth, but they can be divided into two categories–Quantities of available resources—especially capital—can increase•An increase in physical capital enables economy to produce more of everything that uses these tools –More factories, office buildings, tractors, or high-tech medical equipment •Same is true for an increase in human capital–Skills of doctors, engineers, construction workers, software writers, etc. –Technological change enables us to produce more from a given quantity of resources – example internet –people can produce more without working longer hours.Economic Growth•Increases in capital and technological change often go hand in hand•For instance, PET body scanners will enable us to save even more lives–Moving horizontal intercept of PPF rightward, from F to F‘–Impact of PET scanners stretches PPF outward along horizontal axis•How can a technological change in lifesaving enable us to produce more goods in other areas of the economy?–Society can choose to use some of increased lifesaving potential to shift other resources out of medical care and into production of other things•Because of technological advance and new capital, we can shift resources without sacrificing livesThe Effect of a New MedicalTechnologyNumber of Lives Saved per PeriodQuantity of All Other Goods per Period300,000 500,000 600,0001,000,000700,000AJDHF1. A technological advance in saving lives increases this PPF's horizontal intercept . . .4. or more lives saved and greater production of other goods.3. The economy can end up with more lives saved and un-changed production of other goods . . .2. But not its vertical intercept.F'•Interesting result? How ‘J’ is possible?-because society can choose to use