WEEK 3: Opportunity Costs, Production Possibilities, Supply, and Demand

The Production Possibilities curve - Causes of shifts

- Change in technology - Economic growth - Natural disaster / war - investment vs consumer goods

Supply - Causes of shift of curve

- resources - technology - number of producers/sellers - inflation

Demand - Causes of movement along curve and shifts of curve

A raise in price of a good or service almost always decreased the quantity demanded of that good or service.

The Production Possibilities curve

Because society has limited resources (i.e. labor, land, capital, raw materials) at any point i time, there is a limit to the quantities of good and services it can produce. Suppose a society desires to products, healthcare and education. This production possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting them to education. At A all resources to go to healthcare. At B, most go to healthcare. At D most go to education, and at F, all go to education,

Opportunity costs—examples and implications

Cost in terms of the forgone opportunity to pursue the best possible alternative activity with some time or resources Opportunity cost of economics class: taking 15 credits , should you drop econ to take history? Well, what's the opportunity cost of economics?- It's not the cost of taking 3 credits? NO - the differential effort or study, major requirements

Demand - Law of demand and shape of demand curve

Demand is the amount of good or service consumers are willing and able to purchase at each price.

The Production Possibilities curve - How is the PPC related to the division of labor

Depending on your position on the curve, you will be producing more of one thing and less of another

Demand - Marginal utility

Economists assume that there of some good one sums, the more utility one obtains. At the same time, the utility a person receives from consuming the first unit of a good is typically more than the fifth or tenth unit of that same good.

Demand - Diminishing marginal utility and implications (i.e. newspapers and candy bars)

Explains why people and societies rarely make all-or-nothing choices. i.e. "'My favorite food is ice cream, so I will eat nothing from ice cream fro,, now on.' Instead, even if you get a very high level of utility from your favorite food, if you ate it excessively it will not be very good anymore.

Supply - Causes of movement across curve

Price change that is not caused by anything

The Production Possibilities curve - Regions (inefficient, impossible, efficient)

Productive efficiency means its possible to produce more of one good without decreasing the quantity that is produced of another good. Points A, B, C, D, and F display productive efficiencyPoint R is productively inefficient because it is possible at choice C to have more of both goods: education on the horizontal axis is higher at C than at E (E2 is greater than E1), and healthcare on the vertical axis is also higher at point C than point R (H2 is greater than H1). Allocative efficiency means that the particular mix of goods a society produces represents the combination that society most desire.

Supply - The law of supply and the shape of the supply curve

Supply is the common relationship that higher prices lead to a greater quantity supplied and vise versa, while all other variables are held constant

The Production Possibilities curve - Relation to opportunity costs

The PPC clearly shows the tradeoff between healthcare and education.

The Production Possibilities curve - Diminishing marginal returns and shape of PPC (straight vs. curved)

The reason for straight lines was that the slope of the budget constraint was determined by relative prices of the two goods int he consumption budget constraint. The curvature of the production possibilities frontier shows that as additional resources are added to education, moving from left to right along the horizontal axis, the original gains are fairly large, but gradually diminish. The law of diminishing returns produces the outward bending shape of the PPC.