PowerPoint PresentationSlide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Opportunity Cost and Production PossibilitiesOverheadsOpportunity CostOpportunity CostThe The opportunity costopportunity cost of any choice of any choiceis what we give up when we makeis what we give up when we makethat choicethat choiceThe The opportunity costopportunity cost of any good or of any good or serviceserviceis its value in its next best alternative useis its value in its next best alternative use.. For example, the For example, the opportunity costopportunity cost of the of theservice of an service of an inputinput used in the production used in the productionof any particular commodity is the of any particular commodity is the maximum maximum amount that the input would amount that the input would produceproduce of any other commodity. of any other commodity.Examples of Opportunity CostExamples of Opportunity Cost1.1.Farmer who raises hogs and considers Farmer who raises hogs and considers using his own corn to feed the hogsusing his own corn to feed the hogs2.2.Recent college graduate who chooses Recent college graduate who chooses a high paying job in Chicago when his a high paying job in Chicago when his family all live in Iowa and he plans to family all live in Iowa and he plans to visit them once or twice a monthvisit them once or twice a month3.3.Businessman who hires a maid to clean his Businessman who hires a maid to clean his house so he has time to do more consulting house so he has time to do more consulting in the eveningin the evening4.4.Woman who is considering whether to Woman who is considering whether to stay home and take care of her childrenstay home and take care of her childrenor work at a job paying $9.50 per houror work at a job paying $9.50 per hourand hire a baby sitterand hire a baby sitterExamples of Opportunity CostExamples of Opportunity Cost5.5.Seamstress who chooses to make blue Seamstress who chooses to make blue shirts instead of striped shirtsshirts instead of striped shirts66..A landowner decides to farm his A landowner decides to farm his own land instead of renting it to a own land instead of renting it to a neighborneighborExamples of Opportunity CostExamples of Opportunity CostIndividuals who have a high value of time - Individuals who have a high value of time - either due to high income, either due to high income, or personal preferenceor personal preference- have a high opportunity cost for- have a high opportunity cost foralternative activitiesalternative activitiesAll economic decisions taken by individuals All economic decisions taken by individuals or society are costly or society are costly Principle of Opportunity CostPrinciple of Opportunity CostThe correct way to measure the cost of a The correct way to measure the cost of a choice is its opportunity cost — choice is its opportunity cost — that which is that which is given upgiven up to make the choice to make the choiceThe Process of ProductionUses InputsProduces OutputsAn input is a good or service that An input is a good or service that is employed in the production is employed in the production processprocessInputs are denoted by x or byInputs are denoted by x or byxx11, x, x22, … , x, … , xnnAn output is a good or serviceAn output is a good or servicethat is the outputthat is the outputof a particular production process of a particular production process Outputs are denoted by y or byOutputs are denoted by y or byyy11, y, y22, … , y, … , ymmProduction TechnologiesProduction TechnologiesThe The technology settechnology set (technology for short) (technology for short) for a given production process is defined for a given production process is defined as the set of as the set of all input and output all input and output combinationscombinationssuch that the such that the set of outputs yset of outputs y can be produced fromcan be produced from the given set of the given set of inputs xinputs xThe technology set is the set of The technology set is the set of feasible input and output feasible input and output combinationscombinationsInputs Used for Producing Holes in the GroundInputs Used for Producing Holes in the Groundshovel semi skilled laborOutput for the Digging TechnologyOutput for the Digging TechnologySome number of postholes or trenchesSome number of postholes or trenches1 shovel 1 hour semi skilled labor4 postholes 0 trenchesElements of the Digging Technology SetElements of the Digging Technology Set1 shovel 1 hour semi skilled labor0 postholes 2 trenches1 shovel 1 hour semi skilled labor2 postholes 1 trenchesElements of the Digging Technology SetElements of the Digging Technology Setpowdered milk water eggs oilflour baking powder salt bowlwhip measuring set cup spatulasmall griddle camp stove white gas matchessemi skilled labor butter maple syrupplate knife forkInputs Used for Producing PancakesInputs Used for Producing PancakesThe Output (single) for the Pancake TechnologyThe Output (single) for the Pancake TechnologySome number of pancakes served Some number of pancakes served on a plate with butter and syrup on a plate with butter and syrup along with a knife and forkalong with a knife and forkOne Element of the Pancake Technology SetOne Element of the Pancake Technology Set1/3c powdered milk 15/16c water 1egg 2Toil1c flour 2t baking powder 1/4t salt 1bowl1whip 1measuring set 1 cup 1 spatula1small griddle 1camp stove 1/4c white gas 2matches1/4 h semiskilled labor 3Tbutter 1/2c maple syrup1plate 1knife 1fork10 pancakesThe Producible Output Set P(x)The Producible Output Set P(x)The producible output set P(x) is the set of all combinations of outputs, that are obtainable from a fixed level of inputs.Construction of the Producible Output SetConstruction of the Producible Output SetFix all inputs at a specific level¯x ( ¯x1, ¯x2, ¯x3, , ¯xn)For that level of y1, list all feasiblelevels of y2 , then repeat this for all otherlevels of y1.Fix the level of y1 at some level, say ¯y1pancakescrepesP(x)Producible Output Set for Pancakes and CrepesProducible Output Set for Pancakes and Crepes512141000Law of Increasing Opportunity
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