ECON 1113 1st Edition Lecture 2Outline of Last Lecture I. The Basic Economic ProblemA. Two Economic FactsB. Economic ResourcesC. Scarce Economic Resources vs. Unlimited Material WantsOutline of Current Lecture I. Production Possibilities AnalysisA. AssumptionsB. Production Possibilities TableC. Production Possibilities CurveD. Explanation of Production Possibilities CurveE. Relaxing the AssumptionsCurrent LectureI. Production Possibilities Analysis (PPA)A. Assumptions (simplifying and general characteristics of economic principles) – unrealistic1. Two Goodsa. Consumer goods (goods consumed directly)b. Capital goods (goods used to produce other goods)2. Resources are fixed in quantity3. Technology does not advance4. No unemployment or underemployment of resources existsa. Underemployment: resources being employed/used but not to their full potentialB. A Production Possibilities Table (PPT)Production AlternativesGoods A B C D EConsumer 10 9 7 4 0Capital 0 1 2 3 4These 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.1. Dollar Voting in Market Economy (USA)a. When individuals spend money in the United States market, they are voting for products with their purchasesb. Thus, the PPT would offer produces different production options to maximize profit for their businesses2. Command Economy (former Soviet Union) – determined by the national Politburo through 5 year plans which set the consumer and capital production of goodsa. Not capital goods but military goods in this instance due to the regime’s agendab. Desire more “military” goods rather than consumer goodsc. Therefore, you must choose and sacrifice for choiceC. A Production Possibilities Curve (PPC)1. Capital goods form the y-axis of the graph2. Consumer goods form the x-axis of the graph3. The PPC summarizes the basic economic problem4. The curve is one line that displays the potential possibilities offered by thefour basic resources0 2 4 6 8 10 1200.511.522.533.544.5Production Possibilities Curve Based on the Above TableProduction Possibilities CurveConsumer Goods (C)Capital Goods (K)D. What the PPC Table Illustrates1. The necessity of choices (points that occur on the PPC)2. Economic costs (downward/negative slope of the PPC)a. The curve illustrates the idea of increasing economic costs (shown by the concavity of the PPC)b. Additional units of 1 good require that increasing amounts of the other goods must be foregone or given up (sacrifice still involved)c. Why? Its not a straight line.3. Scarcity creates a limit on the possibilities, creating the PPC4. Points inside the PPC display less than total utilization of resources5. Points outside the PPC are unattainable due to scarcity of resources, but these circumstances are preferable and growth will expand the PPC to points that currently lie beyond the PPCE. Relax the Assumptions to mirror a more accurate economic reality1. Positive unemployment and/or underemployment (another reason for points inside the PPC)a. Unemployment can refer to any of the four basic resources2. Growth (or increases) in economic resources and/or technological advancea. Shown by shifts in the entire PPC that move the line outward, to the right and upward3. Currently, the US does not fully employ all resources, so the point representative of that economy lies within the