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Chapter 2Chapter 2Production Possibilities, Production Possibilities, Opportunity Cost, and Opportunity Cost, and

Economic GrowthEconomic Growth

Microeconomics for TodayMicroeconomics for TodayIrvin B. TuckerIrvin B. Tucker

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What will I learn in What will I learn in this chapter?this chapter?

•Having learned that Having learned that scarcity forces choices, scarcity forces choices, here you will study the here you will study the choices people make in choices people make in more detailmore detail

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What are the three What are the three fundamental fundamental

economic questions?economic questions?1.1.What to produce?What to produce?2.2.How to produce?How to produce?3.3.For whom to For whom to

produce?produce?

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What are two key What are two key concepts in this concepts in this

chapter?chapter?

•Opportunity costsOpportunity costs•Marginal analysisMarginal analysis

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What isWhat isopportunity cost?opportunity cost?•The best alternative The best alternative sacrificed for a sacrificed for a chosen alternativechosen alternative

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What opportunity cost What opportunity cost am I experiencing am I experiencing

now?now?•The most money that you The most money that you could be making if you were could be making if you were somewhere else instead of somewhere else instead of studying these slides studying these slides

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Can opportunity cost Can opportunity cost be something other be something other

than money?than money?•Yes, that most desired Yes, that most desired

activity that you are activity that you are presently giving up is presently giving up is considered an opportunity considered an opportunity costcost

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Scarcity

Choice

OpportunityCost

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What isWhat ismarginal analysis?marginal analysis?•An examination of the An examination of the effects of additions to effects of additions to or subtractions from a or subtractions from a current situationcurrent situation

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What is an example of What is an example of marginal analysis?marginal analysis?

•When your benefit of When your benefit of studying these slides studying these slides exceeds the opportunity exceeds the opportunity cost, you will spend time cost, you will spend time studying these slidesstudying these slides

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What is a production What is a production possibilities curve?possibilities curve?

•A curve that shows the A curve that shows the maximum combinations of maximum combinations of two outputs that an two outputs that an economy can produce, economy can produce, given its available given its available resources and technologyresources and technology

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What is technology?What is technology?

•The body of knowledge The body of knowledge and skills applied to how and skills applied to how goods are producedgoods are produced

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What assumptions What assumptions underlie the production underlie the production

possibilities model?possibilities model?1.1.Fixed resourcesFixed resources2.2.Fully employed Fully employed

resourcesresources3.3.TechnologyTechnology unchanged unchanged

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What is the conclusion What is the conclusion of the production of the production

possibilities curve?possibilities curve?•Scarcity limits an Scarcity limits an economy to points on economy to points on or below its production or below its production possibilities curvepossibilities curve

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What are What are efficient points?efficient points?

•Because all the points Because all the points along the curve are along the curve are maximum output levels maximum output levels with given resources with given resources and technology, they are and technology, they are called efficient pointscalled efficient points

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What happens when What happens when we move between we move between

two efficient points?two efficient points?•A movement between any two A movement between any two

efficient points on the curve efficient points on the curve means that more of one means that more of one product is produced only by product is produced only by producing less of the otherproducing less of the other

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AO

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Output of consumer goods

Production Possibilities Curve

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UInefficient point

ZUnattainable point

All points on curve are efficient

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What is the law of What is the law of increasing increasing

opportunity costs?opportunity costs?•The principle that the The principle that the opportunity cost opportunity cost increases as production increases as production of one output expandsof one output expands

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AO

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Output of consumer goods

The Law of Increasing Opportunity Cost

B

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All points on curve are efficient

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What isWhat iseconomic growth?economic growth?

•The ability of an economy The ability of an economy to produce greater levels to produce greater levels of output, an outward of output, an outward shift of its production shift of its production possibilities curvepossibilities curve

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What makes possible What makes possible economic growth?economic growth?

•Research and Research and development of new development of new technologiestechnologies

•Increase production in Increase production in excess of worn out capitalexcess of worn out capital

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Technologicaladvance

Economicgrowth

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Pizzas

Technological Advance

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Technological Advance

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What happens when a What happens when a country does not invest country does not invest

in new technology?in new technology?•Everything else being Everything else being equal, the country will not equal, the country will not growgrow

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What is investment?What is investment?

•The accumulation of The accumulation of capital, such as factories, capital, such as factories, machines, and inventories, machines, and inventories, that is used to produce that is used to produce goods and servicesgoods and services

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What is the What is the opportunity cost of opportunity cost of

investment?investment?

•The consumer goods that The consumer goods that could have been purchased could have been purchased with the money spent for with the money spent for plants and other capitalplants and other capital

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What does an What does an increase in increase in

investments make investments make possible in the future?possible in the future?

•Economic growth and Economic growth and more goods and servicesmore goods and services

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What conclusion can What conclusion can we make about we make about investments?investments?

•A nation can accelerate A nation can accelerate growth by increasing growth by increasing production of capital goods production of capital goods in excess of the capital in excess of the capital being worn outbeing worn out

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