ECO 2030 1st Edition Lecture 5 Outline of Last Lecture I Elements of Circular Flow Diagram Outline of Current Lecture II Productions possibilities frontier review A What to know for Quizzes III The PPF and Opportunity Cost IV Straight Line vs Bowed PPF V Key Terms Current Lecture Productions possibilities frontier review e g 50 000 available labor hours Producing 1 computer 100 hrs Producing 1 ton of wheat 10 hours Quiz PPF are points possible possible but inefficient or not possible A On the graph find the point that represents 100 computers 3000 tons of wheat label it F Would it be possible for the economy to produce this combination of the two goods Why or why not Yes possible but not efficient not using maximum resource labor hours Anything inside the curve is possible but not efficient in the real world you could be under utilizing various resources factories markets ect 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 B Next find the point that represents 300 computers 3500 tons of wheat label it G Would it be possible for the economy to produce this combination of the two goods Not possible not enough labor hours No anything outside of the curve is unachievable because there are not enough resources labor hours to produce that amount of products Points on the line Possible and Efficient all resources being used Points under the line Possible but not Efficient Some resources under utilized e g unemployments down factories ect Points above the line Not Possible insufficient resources Opportunity Cost Is what needs to be given up to get something else it is the loss or the sacrifice you make The opportunity cost is measured by the slope of the line the steeper the slope the greater the opportunity cost sacrifice Remember Slope rise run In this case the rise 1 000 tons of wheat Loss and the run is 100 computers gain Therefor the opportunity cost sacrifice is 1000 tons wheat for 100 computers note in economics the answer to the slope e g 10 is not very important Economic growth and the PPF Economic growth can shift the PPF outward This can happen with improved efficiency new technologies improved resources resource availability The Shape of the PPF Straight vs bow shaped Straight line concludes that all resources and are created equal or there are similarities in production such as wheat and corn where the skill required is similar The opportunity cost for a straight line remains constant A Bow shaped PPF is Skill related illustrates the concept of increasing the opportunity cost When you are at the steep end of the curve the sacrifice for producing more computers will is a lot of wheat This is because you would have give up your best farmers to produce more computers somthing farmers are not known to be good at In the real world almost all PPF graphs would be bowed Another reason a PPF would be bow shaped is if there were some other resource or mix of resources with varying opportunity costs E g different types of land suited for different uses Terms to Know Microeconomic deals with how households and firms make decisions and how they interact in markets Macroeconomics deals with the economy wide phenomena Things like inflation unemployment and economic growth Remember The economist Plays two roles 1 As a Scientist try to explain the world 2 As a policy advisor try to improve it Positive statements how it is Can be refuted confirmed Normative statement how it should be Cannot refute confirm opinion Examples a Prices rise when the government increases the quantity of money Positive b The government should print less money Normative c A tax cut is needed to stimulate the economy Normative d An increase in the price of burritos will cause an increase in consumer demand for music downloads Positive
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