ECO 2030 1st Edition Lecture 5Outline of Last Lecture I. Elements of Circular-Flow DiagramOutline of Current Lecture II. Productions possibilities frontier reviewA. What to know for Quizzes III. The PPF and Opportunity CostIV. Straight Line vs Bowed PPFV. Key TermsCurrent LectureProductions possibilities frontier review:e.g. 50,000 available labor hours Producing 1 computer = 100 hrsProducing 1 ton of wheat = 10 hoursQuiz - 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 economyto 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 whatneeds to be given up to getsomething else (it is the lossor the sacrifice you make).The opportunity cost ismeasured by the slope of theline, the steeper the slopethe greater the opportunitycost/sacrifice.Remember: Slope =rise/runIn this case the rise = 1,000tons of wheat (Loss) and therun is 100 computers (gain).Therefor the opportunitycost/sacrifice is 1000 tonswheat 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 PPFStraight vs bow shapedStraight line concludes that allresources and are created equal - orthere are similarities in production -such as wheat and corn where theskill required is similar. The opportunity cost for a straight lineremains constant. A Bow shaped PPF is Skill related -illustrates the concept of increasingthe opportunity cost. When you are atthe steep end of the curve, thesacrifice 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 landsuited 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.
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