Midterm 1
I. PPF: Production Possibilities Frontier
A. Scarcity
B. Tradeoffs
C. Growth
D. Efficiency
E. Opportunity cost
F. Models are simplified versions of reality
1. Making some unrealistic assumption
II. PPF Model
A. Only 2 goods: computers and cars (don’t care about the cost yet)
B. Resources and technological levels are constant
C. Downward slope
D. Moving to the right, more cars, less computers
1. Scarcity: more for one good, less for the other
2. Tradeoffs: not both, only either or
E. Efficiency: using all resources → on the curve
1. Little inefficiency is living “inside the curve” – reality
2. “outside the curve” → unattainable or not feasible
F. Opportunity cost: what is the thing you have to give up for the next best choice
1. Subjective: all based on personal opinion, not one best opportunity cost for all people
2. Able to make rational choices based off of opportunity cost
a. Kobe Bryant, not an irrational choice to skip college because he made a boatload of money for first contract
b. LMU costs 58K a year; foregone income
c. Tiger Woods: went to school 2 years, could have made money throughout those 2 years
i. Both Kobe and Tiger were good decisions, even though they made different decisions. PGA is a long term sport; NBA, not so much
3. Ceteris paibus: all else equal → focusing only on their opportunity cost and not their past and/or background
G. Link between graph and opportunity cost: slope of PPF = opportunity cost
1. Increasing opportunity cost principle: Concave shape → higher opportunity cost as you go down and to the right of the curve
a. Absolute value of the slope
2. Reason for increasing opportunity cost principle
a. Imperfect substitution among resources
b. Cannot expect a computer specialist to be as good at a person who is producing cars
c. More difficult to make the transformation, more concave the PPF
i. More unrelated, more concave
H. Growth: producing more of the goods → outward shift of the PPM
1. Growth
A. Scarcity
B. Tradeoffs
C. Growth
D. Efficiency
E. Opportunity cost
F. Models are simplified versions of reality
1. Making some unrealistic assumption
II. PPF Model
A. Only 2 goods: computers and cars (don’t care about the cost yet)
B. Resources and technological levels are constant
C. Downward slope
D. Moving to the right, more cars, less computers
1. Scarcity: more for one good, less for the other
2. Tradeoffs: not both, only either or
E. Efficiency: using all resources → on the curve
1. Little inefficiency is living “inside the curve” – reality
2. “outside the curve” → unattainable or not feasible
F. Opportunity cost: what is the thing you have to give up for the next best choice
1. Subjective: all based on personal opinion, not one best opportunity cost for all people
2. Able to make rational choices based off of opportunity cost
a. Kobe Bryant, not an irrational choice to skip college because he made a boatload of money for first contract
b. LMU costs 58K a year; foregone income
c. Tiger Woods: went to school 2 years, could have made money throughout those 2 years
i. Both Kobe and Tiger were good decisions, even though they made different decisions. PGA is a long term sport; NBA, not so much
3. Ceteris paibus: all else equal → focusing only on their opportunity cost and not their past and/or background
G. Link between graph and opportunity cost: slope of PPF = opportunity cost
1. Increasing opportunity cost principle: Concave shape → higher opportunity cost as you go down and to the right of the curve
a. Absolute value of the slope
2. Reason for increasing opportunity cost principle
a. Imperfect substitution among resources
b. Cannot expect a computer specialist to be as good at a person who is producing cars
c. More difficult to make the transformation, more concave the PPF
i. More unrelated, more concave
H. Growth: producing more of the goods → outward shift of the PPM
1. Growth