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Purdue AGEC 21700 - Production Possibilities Frontier
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AGEC 217 1st Edition Lecture 4Outline of Last LectureI. The Economy of the United StatesII. Economic RulesA. Examples of RegulationsIII. The Rise of GlobalizationIV. Choices in a World of ScarcityA. Example ProblemV. What the Budget Line tells youVI. Mathematical Budget EquationOutline of Current Lecture I. Opportunity CostA. Cost of going to CollegeII. Thinking on the MarginA. Definition of UtilityIII. An Example of Sunk CostA. Definition of Sunk CostIV. Society Decision MakingA. Production Possibilities FrontierB. Graph ExampleV. Technology ImprovementCurrent LectureCost does not just refer to a monetary value. Economics thinks of it as opportunity cost. That is, the cost of something is what you give up to get it. An example is going to college. The cost not only includes monetary tuition, but the opportunity cost. You are giving up time to do something else by attending college. Economics says that there is always a cost for every decision made. At the very least, there is a cost of time. This all goes back to concept of scarcity in decision making. Consumers often do what is called “thinking on the margin”. This refers to people not deciding on the total ahead of time. Consumers make decisions one unit at a time. They look at what the benefit or cost is of one more unit. Economics also looks at utility. Utility is what the value of consumption is to the consumer, or how happy the decision makes the consumer. 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.Referring back to the budget line, consumers want to choose a point on the line that maximizes utility. Consumers must also think about the economic concept of sunk cost. Sunk cost is the paid cost that can’t be recovered, no matter what you do. An example of this would be if you paid 10 dollars to go see a movie. 30 minutes into the movie, you might decide you hate it and want to walk out. Most consumers will decide to stick it out, in order to make up for the cost. If the consumer thinks about it from an economic point of view, they will see that they are really wasting time if they stay. By weighing the opportunity cost, the consumer will see that the best choice forward has nothing to do with the sunk cost.Societies make decisions in a different manner. Their decisions are production ones that are based on scarce resources. This leads to the concept of a production possibilities frontier. This type of graph gives all the possible combination of goods that can be produced with the given technology and resources. An example of the graph is shown below. The graph will always be curved and nonlinear. Like a budget line, the slope will be negative and will show opportunitycost. It won’t have any numbers on it though. This example shows a comparison of healthcare and education. The x and y axes can be switched. The concave shape will remain the same. This graph shows that the value changes depending on production. HealthcareEducationThe negative slope is indicative of the fact that if you want more education, you have to give up some healthcare. The cost goes up with increased production. That is, the resources are not easily transferred to the other good. The best resources are used first. An improvement in technology will only influence the production of one good. The production possibilities frontier will rotate out farther for the good affected. In the end, both goods will be impacted though. This is due to more being consumed, which is due to an increase in


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Purdue AGEC 21700 - Production Possibilities Frontier

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