I. Introduction: economics and the economic way of thinking
A. Fundamental economic concepts (finish)

    Share answers to handout

    Part 1. Opportunity costs:

    Lessons from examples:
    Example 1: Forgone interest = an opportunity cost of using funds for investments
    Example 2: Choices reveal information about opportunity cost
    Example 3: Economic costs include explicit costs (such as market prices) and implicit costs (such as time)
    Example 4: Forgone income = an opportunity cost of choices involving the use of time
        Oxy example: You may not pay much of direct expenses, but you pay almost all of the sacrificed earnings.
    Bill Gates, Mark Zuckerberg, Steve Jobs, David Geffen, James Cameron, Clint Eastwood,
Quentin Tarantino, Steven Spielberg, Jeffrey Katzenberg, Peter Jackson, Harvey Weinstein, Barry Diller, Ron Meyer, Scott Rudin

    Part 2. Responding to incentives

    Example: Women as percent of college students:
    1960: 33% 2000: 56%
    http://www.census.gov/prod/2003pubs/02statab/educ.pdf

    Why?

    More favorable benefit-cost situation:
    Higher wages
    Less discrimination
    Less stigma

B. The production possibilities frontier (PPF)

Learning objectives: Use a PPF to illustrate scarcity, choice and opportunity cost. Distinguish between events that move an economy to a new production point versus a new PPF.

    We can't illustrate the issues we've described graphically
    --economists are fond of graphs
    --A lot of us can't write clearly enough, so we draw lots of pictures

Production possibilities Option Guns Roses a 0 50 b 1 45 c 2 35 d 3 20 e 4 0

    A production-possibility frontier (PPF) shows the various combinations of outputs which an economy can produce when resources are fully employed and efficiently used.
    Products = outputs (axes)
    Resources = inputs (determine where to draw the curve)

    Properties of PPFs:

    Add points: g: outside

    Scarcity:
    ? How can we tell from this diagram that scarcity exists?
        unattainable--due to scarcity

    Property (1): scarcity makes the region outside the PPF unattainable.
            f: inside--attainable (=> unemployment or inefficiency)

    Choice:
    ? How could we use the PPF to illustrate the impact of the war on terrorism?

    contrast 2 points on PPF: d vs. c

    Property (2): choice determines which attainable output combination gets produced.

    Opportunity cost:
    ? What is ... 
    OC of... Gun #1: 5 roses
        Gun #2: 10 roses
    These = marginal costs -- the extra cost of each extra gun

    ? How does a PPF illustrate OC?
    Draw PPF sloping up

    ? What is ... 
    Total OC of the first 2 guns?

    Property (3): opportunity cost makes the PPF slope downward
    An economy must reduce Qr to increase Qg and vice versa

    Note here, we not only have OCs, but the OC goes up as we expand production of either good.
    ? Why does OC rise with production?
    Resources are generally better at some activities than others.
    Part of being efficient is specializing in what you are relatively good at => you have a low OC.
    Two ways to get a low OC for producing guns:
    Be very good at making guns
    Be very bad at growing roses
    If we were all the same how would the PPF look?

    Property (4): If OC increases with production of a good, the PPF will be "bowed outward" (concave to the origin).

    Goal for efficiency: minimize the OC of satisfying your choices.
    To be efficient, increase output of an item by using low OC producers before high OC producers.

    Propery (5): changes in long-run production capabilities shift an economy's PPF

    ? Examples of developments which would have this effect?
    Change in resources: natural resources, labor
    Plant and equipment
    Technological change
    Public policies
    Customs