Experimental Economics and the Production Possibility Frontier

IBEconomics

Objectives

• To complete coverage of production possibility curves / frontiers

• Take part in the first economic experiment

• To analyse results• To draw conclusion and prove a

fundamental law of Economics – link to TOK!

Recap - PPF

• Shows the maximum output of a combination of goods and services that can be achieved with a given set of inputs

Production Possibility Frontiers

Capital Goods

Consumer Goods

Ym

Xm

Production Possibility Frontiers

• No ‘ideal’ point on the curve• Any point inside the curve – suggests resources

are not being utilised efficiently• Any point outside the curve – not attainable with

the current level of resources• Useful to demonstrate economic growth and

opportunity cost

Why is it curved?

• Think carefully about the idea of opportunity cost

• The easiest way to draw a ppf would be a straight line, why would this be

wrong??wrong??

Guns or Butter?

Brain stretcher!!

• Draw a new ppf diagram using guns and butter as the two axis.

• Look at the opportunity cost of moving between different points on the frontier.

Ideas

• What sort of things are needed to produce butter?

• Milk• Cows• What about things needed to produce

guns?• Metal • Machinery

Not very easily transferable Not very easily transferable are they???are they???

Utility

What is utility?

• Simply another word for usefulness• Some products give more utility than

others.

Extra Thought Question

• The satisfaction from consuming a good.

• How can we measure it?

Measuring Utility

• The accepted way of measuring utility is to have units called utils

The Experiment!

Volunteer????

The Experiment

• This experiment is designed to test a central economic law relating to utility

Recording the results

• Your handout has a table like this on one side.

• Record the values for utility (satisfaction gained) as the experiment continues.

Number of biscuits

consumed

Total satisfaction

gained

Extra satisfaction

gained

What do the results mean?Number of

biscuits consumed

Total satisfaction gained

Extra satisfaction gained

Drawing a graph.U

tili

ty (

uti

ls)

Quantity of Biscuits consumed

Law of Diminishing Utility

• This simple law basically states that as a consumer has more and more of a good her total utility will rise up to a point.

• The extra utility from each extra good consumed will get smaller and smaller.

• The extra utility could even become negative if consuming more of the unit actually makes her total utility fall!

Right, and……………?

• This is one of the things that underpins everything in Economics.

• From this we can draw conclusions about DEMAND.

Demand

• Demand looks at the quantity of products consumers will want to buy at different prices.

Your task

So many things!

• In Economics we need to make a few assumptions for any of our models to work, otherwise it would be impossible to make any sort of analysis

Assumptions

• Consumers act in a rational way• Ceteris Paribus

Ceteris What?

• Ceteris Paribus Ceteris Paribus means other things being equal

i.e. no other factors change.

Summary

• Diminishing Returns means• Utility is a major part of the law of • People would be willing to pay more

for products that give greater utility

Why do people pay massively more for diamonds than water when water is immensely more

useful????