ECON 251 1st Edition Lecture 3 Outline of Last Lecture I. TermsII. Sunk CostIII. Marginal Benefit (MB) and Marginal Cost (MC)IV. Absolute Advantage and Comparative AdvantageOutline of Current Lecture I. TermsII. Production Possibilities FrontierIII. Individual PPFsIV. Economy-Wide PPFsV. Shifts in PPFsVI. Law of DemandCurrent LectureI. TermsProduction Possibilities Frontier (PPF): graph of the maximum output that can be producedPoint of specialization: point in which one person is doing all of one taskInefficient: points below the PPFUnattainable: points above the PPFEfficient: points on the PPFProduction Efficiency: producing a combination of goods as cheaply as possibleAllocative Efficiency: resources are used where they are most highly valuedDemand: maximum quantity a consumer is willing and able to purchase at various prices Law of Demand: inverse relationship between price and quantity demandII. Production Possibilities Frontier (PPF)Recall the example used in comparative advantage and absolute advantage:# of Baths cleaned per hour # of Beds made per hourScot 4 12Caroline 3 10These 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.Scott’s Costs: 1 bathroom costs 3 beds1 bed made costs 1/3 of a bathroomCaroline’s Costs: 1 bathroom costs 3 1/3 beds1 bed costs 3/10 of a bathroomIII. Individual PPFsScott’s PPFSlope = ∆∆¿ BEDS¿¿BATHS ¿ = -3 (his MC)Caroline’s PPFSlope = -3 1/3 (her MC)Characteristics of Individual PPFs:1. Always has a negative slope (something always has to be given up)2. The magnitude of the slope reflects the marginal cost (MC) of “x”, with “x” being the product.Reading graphs without numbersExample: Julie and Jack does laundry and mows lawns- Julie has the absolute advantage in both doing loads of laundry and mowing lawns- Jack has the comparative advantage in mowing lawns (flatter slope)IV. Economy-Wide PPFs-Refer to the example with Scott and Caroline cleaning bathrooms and making beds-Maximum number of bathrooms cleaned: 4 +3 = 7 (7,0)Maximum number of beds made: 22 (0,22)**Note: graph the points with the lowest cost firstCharacteristics of Economy-Wide PPF:1. Negative slope2. Magnitude of slope reflects MC of “x”3. Slopes gets steeper as “x” increases (unless both people have the same costs). MC rises as “x” risesExample:A B C D ECars 0 10 20 30 40Doughnuts 600 560 500 400 0- Between A and B: MC = 4 doughnuts (difference between doughnuts from A to B is 40, difference between cars from A to B is 10, so 40/10 = 4) - Between B and C: MC = 6 doughnuts- Between C and D: MC = 10 doughnuts- Between D and E: MC = 40 doughnutsA = (0,600)B = (10,560)C = (20,500)D = (30,400)E = (40,0)V. Shifts in PPFsShifts are any change in level of resources or productivity of resources such as:- Increase in natural resources- Increase in labor- Increase in capital- Increase in entrepreneurship- Increase in technologyVI. Law of DemandExample: Girl Scout Cookies Qd = quantity demandedP = priceQd P6** 05 24 43 62 81 100 12**Even if the price is zero, people are only willing to eat so many boxes of Girl Scout cookiesPrice = the dependent variable Quantity Demanded = the independent variableQd = 1/2P + 6  not in slope-intercept form (Qd = x)So we can rewrite it: P = -2Qd + 12- P being the