Review From last ClassReview From last Class

What does “marginal” mean?T or F: You should continue consuming

something as long as marginal benefit > marginal cost.

If MB is $7 and MC is $10, what is the overall utility?

What is the Law of Diminishing marginal utility?

Review From last ClassReview From last Class

Roller CoasterRides Marginal Utility Total Utility

1 9 92 7 163 3 194 1 205 -2 186 -5 13

* Remember Marginal Utility = Marginal Benefit - Marginal Cost

Production Possibilities Production Possibilities CurvesCurves

IntroductionIntroduction

Production Possibilities Curve: A Graph that shows all the different ways a business or nation can use it’s resources.

IntroductionIntroduction

In order to graph a production possibilities curve, you first need to have a production possibilities table/schedule.

Let’s Walk Through an ExampleLet’s Walk Through an Example

Let’s suppose we own a restaurant that only makes two products, pizza and calzone.

ExampleExample

Does anyone disagree with the following statement???

The more pizzas we make, the less calzones we will be able to make b/c we have a limited amount of cheese, sauce, workers, oven space, etc.

ExampleExample

Let’s assume that through our research, we can choose to produce at any point on the chart below:

Pizza CalzoneOption A 10 0Option B 7 4Option C 4 5Option D 0 9

Example-Real World DecisionExample-Real World Decision

Let’s assume that pizzas and calzones sell for $5 each (cost to make each is the same)

Which option should we choose to produce at? Why?

Look on sideboard!Pizza Calzone

Option A 10 0Option B 7 4Option C 4 5Option D 0 9

Using PPC to Figure Out Using PPC to Figure Out Opportunity CostOpportunity Cost

If we move from option A to option B, we gain 4 calzones…how many pizzas are we giving up?

That is the opportunity cost!

Pizza CalzoneOption A 10 0Option B 7 4Option C 4 5Option D 0 9

Using PPC to Figure Out Using PPC to Figure Out Opportunity CostOpportunity Cost

Remember, an opportunity cost is what we give up when we choose one course of action over another.

1.What is the opportunity cost of producing 10 pizzas instead of 4 pizzas?2.What is the opportunity cost of producing 4 calzones rather than 0 calzones?

Using PPC to Figure Out Using PPC to Figure Out Opportunity CostOpportunity Cost

Finally…how do we figure out the same thing using a graph instead of a chart?

Pay attention closely to the next slide…it is exactly like 2 test questions.

Using PPC to Figure Out Using PPC to Figure Out Opportunity CostOpportunity Cost

AB

utte

r

Guns7 10 120

15 B

C

D

E

F

12

3 pound of butter

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

PPC Loose EndsPPC Loose Ends

Vocab:“Guns or Butter”: a phrase that refers to the

trade-off that nations face when choosing to produce more or less military or consumer goods.

Lets label the PPC!

PPCPPC

Let’s graph it on the sideboard.

Law of Increasing Marginal Law of Increasing Marginal Opportunity CostOpportunity Cost

The Law of increasing marginal opportunity cost states that opportunity costs increase the more you concentrate on an activity.

In order to get more of something, one must give up ever-increasing quantities of something else.

Law of Increasing Marginal Law of Increasing Marginal Opportunity CostOpportunity Cost

Why is the Law of Increasing Marginal Utility Cost true? This is tough…

Because economic resources are not completely adaptable to alternate uses.

Confused? OK, good!

Law of Increasing Marginal Law of Increasing Marginal Opportunity CostOpportunity Cost

Example: A B C D E

PIZZA 20 19 16 10 0ROBOTS 0 1 2 3 4

List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e and

graph the chart…

Efficiency and InefficiencyEfficiency and InefficiencyG

uns

10

8

6

4

2

0 2 4 6 8 10

Butter

C D

A

B

Efficientpoints

Inefficientpoint

Unattainable point, given available technology, resources and labor force

Tom’s Trade-offs: The Tom’s Trade-offs: The Production Possibility Production Possibility

FrontierFrontier

Shifts in the Production Shifts in the Production Possibility CurvePossibility Curve

Society can produce more output if:Technology is improved.More resources are discovered.Population increase.

Examples of Shifts in the Examples of Shifts in the Production Possibility CurveProduction Possibility Curve

Test your understanding:

A new technology is discovered that doubles the speed at which all goods can be produced.

Global warming increases the cost of producing agricultural goods.