MicroeconomicsEconomicsPowerPoint PresentationSlide 4EXAMPLES OF SOME CHOICES ECONOMISTS HAVE ANALYZEDFactors in decision making, or making choicesOPPORTUNITY COST EXPLAINEDAN ECONOMIC MODEL The Production Possibility CurvePPF DEFINEDPPC EXAMPLEData On Production PossibilitiesThe Production Possibilities CurveSlide 13Computing Opportunity CostSlide 15Slide 16PRODUCTION POSSIBILITY CURVESlide 19Slide 21Slide 23MicroeconomicsIntroduction© 1999 Michigan State University.All rights reserved.Introduction slide 2EconomicsEconomics is the study of how society manages scarce resources.Human resources (labor)Natural resources (land)Manufactured resources (capital)Introduction slide 3Resources are scarce, not free.Introduction slide 4Managing resources is making choices.Introduction slide 5EXAMPLES OF SOME CHOICES ECONOMISTS HAVE ANALYZEDWhether to buy a car this week.Whether to have pizza for dinner tonight, or something else.Whether to marry your sweetheart.How hard to study for this course.Whether to go to college, and if so, which one.Whether to buy a lottery ticket in the Michigan lottery.Introduction slide 6Factors in decision making, or making choices1. Making decisions at the margin.2. People face tradeoffs.3. Opportunity cost.4. People respond to incentives.Introduction slide 7OPPORTUNITY COST EXPLAINEDThe opportunity cost of doing something is what you must give up in order to do it.The cost of a pizza is what you must give up to consume it, which in this case is easily computed in money.The cost of a college education includes both money and other foregone alternatives. For example, the cost of a year at MSU includes not only tuition and books, but the income you could have earned working on a full time job.The cost of attending a Lugnuts baseball game includes the value of the time you could have spent studying economics.Introduction slide 8AN ECONOMIC MODELThe Production Possibility CurvePurposes of modelShow scarcity constraintIllustrate economic efficiencyIntroduce opportunity cost conceptVariablesQuantities of goods that may be producedGivensTotal amounts of inputs availableTechnology of productionIntroduction slide 9PPF DEFINEDThe Production Possibility Curve (or frontier) shows the maximum amount of a good you can produce given the amounts of other goods produced, and given the total amounts of inputs available, and given the technology of production.Introduction slide 10PPC EXAMPLEAssumptions: There are only two goods, Pepsi and MSU flags.There are limited inputs and given technology of production.Definition:The PPC shows the maximum amount of flags you can produce, given the amount of Pepsi to be produced.Introduction slide 11Data On Production PossibilitiespointMSU flags PepsiA 0 9B 1 8C 2 5D 3 0Introduction slide 12The Production Possibilities Curve0123456789100 1 2 3 4MSU flagsPepsiABCDIntroduction slide 13The Production Possibilities Curve0123456789100 1 2 3 4MSU flagsPepsiABCDEUnattainableIntroduction slide 14Computing Opportunity Cost0123456789100 1 2 3 4MSU flagsPepsiABCD-3+1+1-5Introduction slide 15Opportunity costs increase as more of a good is produced.Reason: Resources are not perfect substitutes for each other.Introduction slide 16PPC EXAMPLEAssumptions: There are only two goods, pizza and spaghetti.There are limited inputs and given technology of production.Definition:The PPC shows the maximum amount of pizza you can produce, given the amount of spaghetti to be produced.Introduction slide 17PRODUCTION POSSIBILITY CURVESPAGHETTIPIZZAWhich points are attainableand which points are unattainable?Which points are attainableand which points are unattainable?01002003004000 10 20 30 40 50 60Go to hidden slideIntroduction slide 19PRODUCTION POSSIBILITY CURVESPAGHETTIPIZZAWhat’s the effect of an improvementin the technology for producing spaghetti?What’s the effect of an improvementin the technology for producing spaghetti?01002003004000 10 20 30 40 50 60Go to hidden slideIntroduction slide 21PRODUCTION POSSIBILITY CURVESPAGHETTIPIZZAWhat’s the effect of an increase in total resources (inputs)?What’s the effect of an increase in total resources (inputs)?01002003004000 10 20 30 40 50 60Go to hidden slideIntroduction slide 23Points “inside” the PPC are inefficient.For any point “inside” there corresponds some point that represents more production of both goods.Note that while points on the PPC are efficient, we cannot say at this time whether some are better for society than