One-Question IQ TestOne-Question IQ TestThere is a deaf-mute who wants to buy a There is a deaf-mute who wants to buy a

toothbrush. By imitating the action of brushing toothbrush. By imitating the action of brushing one's teeth, he successfully expresses himself one's teeth, he successfully expresses himself to the shopkeeper and the purchase is done. to the shopkeeper and the purchase is done.

Now, if there is a blind man who wishes to buy Now, if there is a blind man who wishes to buy a pair of sunglasses, how should he express a pair of sunglasses, how should he express

himself?himself?

Essential Terms: Production Possibilities Curve, Production Possibilities Frontier, efficiency, underutilization, law of increasing costs

Decisions at the MarginDecisions at the Margin

““How much?” instead of “What?How much?” instead of “What?Satisfaction with individual unit Satisfaction with individual unit

decreases as additional units are decreases as additional units are addedadded

Productivity of individual unit Productivity of individual unit decreases as additional units are decreases as additional units are addedadded

Law of diminishing returnsLaw of diminishing returns

1-3a

Production Possibilities

Graph

shows alternative ways to use an

economy's resource

production possibilities

frontier

line on a production possibilities

graph shows the maximum possible output

each point on the line reflects

a trade-off

any point on the line represents the

maximum combination of two resources

Guns v Butter

0

2

4

6

8

10

12

14

16

0 5 10 15 20 25

Guns

Bu

tte

r

Efficiency and

Growth

1-3b

copyright 2002 by John Retzer

Efficiency: using resources in such a way as to maximize

production

any point inside the frontier represents underutilization of

resources

production possibilities curve moves to the right because of growth

PPC moves to the left with a shrinking

economy

Guns v Butter II

0

2

4

6

810

12

14

16

18

0 5 10 15 20 25

Guns

Bu

tter

Before

After

Underutilization

1-3c

Costs on the PPC

cost: alternative we give up when we

choose one option over the other

PPC shows that you give up in one thing

to get one unit of another

law of increasing

costs

as we shift factors of

production from one good or

service to another,

the cost of producing

the second increases

Law of Increasing CostsLaw of Increasing Costs

=10

=10

=10

____

30

=10

=10

=10

____

30

Ore Grain

30 30

=10

=10

=10

=5

____

35

=10

=10

____

20

Ore Grain

30 30

35 20

=10

=10

____

20

=5

=10

=10

=10

____

35

Ore Grain

20 35

30 30

35 20

Guns Butter0 158 1414 1218 920 521 0

Graph the following Production Possibilities Curve:

Guns v Butter

0

2

4

6

8

10

12

14

16

0 5 10 15 20 25

Guns

Bu

tte

r

Now, insert a point showing

underutilization.

Guns v Butter

0

2

4

6

8

10

12

14

16

0 5 10 15 20 25

Guns

Bu

tte

r

* Underutilization

GunsGuns ButterButter22 17171010 16161616 14142020 11112222 772323 22

After technological improvements, here is the new Production Possibilities Data. Graph this on the old chart.

Guns v Butter II

0

2

4

6

810

12

14

16

18

0 5 10 15 20 25

Guns

Bu

tter

Before

After

   

1. Use the data above to construct a Production Possibilities Curve. Be sure to label your graph.

2. Mattel produces only 3 million Kens and 5 million Barbies. Plot this point on the graph above.

3. What does this new point represent (in relation to the original line.)

KensKens BarbieBarbiess

11 9933 7755 5577 3399 11

Barbies v Kens

0

2

4

6

8

10

0 2 4 6 8 10

Kens

Bar

bie

s

The next year, Mattel invests in new equipment. The table below represents the new combinations of Kens and Barbies that it could produce.

Use this data to construct a new Production Possibilities Curve on the same grid.

What does this new line represent (in relation to the old)

KensKens BarbieBarbiess

1010 22

88 44

66 66

44 88

22 1010

Barbies v Kens

0

2

4

6

8

10

12

0 2 4 6 8 10 12

Kens

Ba

rbie

s