Principles of Economics 2e Chapter 2 PowerPoint PDF

PRINCIPLES OF ECONOMICS 2e Chapter 2 Choice in a World of Scarcity PowerPoint Image Slideshow CH.2 OUTLINE 2.1: How Individuals Make Choices Based on Their Budget Constraint 2.2: The Production Possibilities Frontier and Social Choices 2.3: Confronting Objecti...

PRINCIPLES OF ECONOMICS 2e Chapter 2 Choice in a World of Scarcity PowerPoint Image Slideshow CH.2 OUTLINE 2.1: How Individuals Make Choices Based on Their Budget Constraint 2.2: The Production Possibilities Frontier and Social Choices 2.3: Confronting Objections to the Economic Approach This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Choices and Tradeoffs (Credit: modification of work by “Jim, the Photographer”/Flickr Creative Commons) In general, the higher the degree, the higher the salary. So why aren’t more people pursuing higher degrees? The short answer: choices and tradeoffs. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. 2.1 How Individuals Make Choices Based on Their Budget Constraint Budget constraint - all possible consumption combinations of goods tha Opportunity set - all possible combinations of consumption that someon Given the price of the two goods and a budget amount, a budget constra With a limited amount of income to spend on things, consumers must cho This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. The Budget Constraint: Alphonso’s Consumption Choice Each point on the budget constraint represents a combination of burgers and bus tickets whose total cost adds up to Alphonso’s budget of $10. The slope of the budget constraint is determined by the relative price of burgers and bus tickets. Giving up one burger means gaining four bus tickets. The opportunity set - every point on (or inside) the constraint which shows a combination of burgers and bus tickets that Alphonso can afford. Any point outside the constraint is not affordable, because it would cost more money than Alphonso has in his budget. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. The Concept of Opportunity Cost Opportunity cost indicates what one must give up to obtain what he or s The cost of one item is the lost opportunity to do or consume someth The opportunity cost is the value of the next best alternative. A fundamental principle of economics is that every choice has an opp For Alphonso, the opportunity cost of a burger is the four bus tickets he w This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for reproduction, but must be attributed to their sources. Identifying Opportunity Cost In many cases, it is reasonable to refer to the opportunity cost as the pric Example: If your cousin buys a new bicycle for $300, then $300 meas Sometimes the price as measured in dollars may not accurately capture t Example: Attending college The out-of-pocket costs of attending college include tuition, book Additionally, during the hours you are attending class and studyi So, college imposes both an out-of-pocket cost and an opportuni This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Opportunity Cost Examples Discussion Question: What are the opportunity costs of... Buying vs. leasing a car Investing in different ways (i.e. savings accounts, certificates of depos Going out to eat vs. preparing food at home Walking or taking public transportation This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Marginal Decision-Making and Diminishing Marginal Utility Marginal analysis - examining the benefits and costs of choosing a little Utility - satisfaction, usefulness, or value one obtains from consuming go Law of diminishing marginal utility - as a person receives more of a go Example - the first slice of pizza eaten brings more satisfaction than t This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Sunk Costs Sunk costs - costs that were incurred in the past and cannot be recovere For people and firms alike, dealing with sunk costs can be frustrating. Example - A firm finds it hard to give up on a new product that is doin The lesson of sunk costs is to ignore the past errors and make decisions This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. 2.2 The Production Possibilities Frontier and Social Choices Production possibilities frontier (PPF) - a diagram that shows the prod The slope of the production possibilities frontier shows the opportunity co This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Healthcare vs. Education Production Possibilities Frontier This production possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting them to education. At A all resources go to healthcare and at B, most go to healthcare. At D most resources go to education, and at F, all go to education. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Healthcare vs. Education Production Possibilities Frontier A society could choose to produce any combination of healthcare and education on the production possibilities frontier. It does not have enough resources to produce outside the PPF. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. The Shape of the PPF and the Law of Diminishing Returns Law of diminishing returns - as additional increments of resources to p The law of diminishing marginal utility is a more specific case of the l This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Healthcare vs. Education Production Possibilities Frontier, Continued The curvature of the PPF shows that as we add more resources to education, moving from left to right along the horizontal axis, the original gains are fairly large, but gradually diminish. By contrast, as we add more resources to healthcare, moving from bottom to top on the vertical axis, the original gains are fairly large, but again gradually diminish. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Differences - Budget Constraint and PPF Two major differences between a budget constraint and a PPF: 1) The budget constraint is a straight line. Slope is given by the relative prices of the two goods, which are fi PPF has a curved shape because of the law of diminishing return 2) The absence of specific numbers on the axes of the PPF. The exact amount of resources an imaginary economy has is not This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Similarities - Budget Constraint and PPF Both the budget constraint and the social production possibilities frontier (PPF) show the constraints under which individual consumers and society as a whole operate. Both diagrams show the tradeoff in choosing more of one good at the cost of less of the other. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Productive Efficiency and Allocative Efficiency Productive efficiency -when it is impossible to produce more of one goo Any choice inside the PPF is productively inefficient because it is pos Allocative efficiency - when the mix of goods produced represents the m This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Healthcare vs. Education Production Possibilities Frontier, Continued Productive efficiency - ○ All choices along a given PPF like B, C, and D display productive efficiency. ○ R does not, because it is inside the PPF curve, and thus not all resources are being used. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. The PPF and Comparative Advantage How much of a good a country decides to produce depends on how expe Countries tend to have different opportunity costs of producing a specific Comparative advantage - when a country can produce a good at a lowe This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. The PPF and Comparative Advantage The U.S. PPF is flatter than the Brazil PPF implying that the opportunity cost of wheat in terms of sugar cane is lower in the U.S. than in Brazil. Conversely, the opportunity cost of sugar cane is lower in Brazil. The U.S. has comparative advantage in wheat and Brazil has comparative advantage in sugar cane. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. 2.3 Confronting Objections to the Economic Approach Objections in understanding the economic approach to decision-making: 1) People, firms, and society do not act in a way that fits the economic way of However, it is reasonable, as a first approximation, to analyze them w Will be addressed in a later chapter on consumer choices. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Confronting Objections to the Economic Approach Objections in understanding the economic approach to decision-making: 2) People, firms, and society should not act this way. The economics approach: Portrays people as self-interested, but economics is not a form of mo Seeks to describe economic behavior as it actually exists. Uses, positive statements, which describe the world as it is. These Tries to avoid normative statements, which describe how the world This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources. Confronting Objections to the Economic Approach Invisible hand - concept that individuals' self-interested behavior can lea Identified in Adam Smith’s The Wealth of Nations. Consumers will encourage businesses to offer goods and services that m It is possible that broader social good can emerge from selfish individual Self-interest in economics does not not imply self-interest in all aspects o This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources.  This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. This OpenStax ancillary resource is © Rice University under a CC-BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. Any images attributed to other sources are similarly available for re production, but must be attributed to their sources.