1 Marginal Analysis 6 Thinking on the Margin This is what you do when you make a decision. You weigh your options, and make a choice. If I do this, then I can t do that is it worth it? 7 Marginal Analysis In economics the term marginal = additional Marginal analysis (aka: thinking on the margin) making decisions based on increments Example: When you decide to go to the mall you consider the additional benefit and the additional cost (your opportunity cost). Once you get to the mall, you continue to use marginal analysis when you shop, buy food, and talk to friends. Since your marginal benefits and costs can quickly change your analyzing them every second. What if your ex-girlfriend shows up? The Point: You will continue to do something as long as the marginal benefit is greater than the marginal cost 8
2 Marginal Analysis video 9 5 Key Economic Assumptions 1. Society has unlimited wants and limited resources (scarcity). 2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off). 3. Everyone s goal is to make choices that maximize their satisfaction. Everyone acts in their own self-interest. 4. Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice. 5. Real-life situations can be explained and analyzed through simplified models and graphs. 10 11
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4 Capital Goods V Consumer Goods 15 Capital v Consumer Goods Capital Goods A capital good is any good deployed to help increase future production. The most common capital goods are property, plant and equipment, or PP&E. Consumer Goods Consumer goods are any goods that are not capital goods; they are goods used by consumers and have no future productive use. 16 The 4 Factors of Production 17
5 The Four Factors of Production ALL resources can be classified as one of the following four factors of production: 1. Land -All natural resources that are used to produce goods and services. (Ex: water, sun, plants, animals) 2. Labor -Any effort a person devotes to a task for which that person is paid. (Ex: manual laborers, lawyers, doctors, teachers, waiters, etc.) 3. Capital - Physical Capital- Any human-made resource that is used to create other goods and services ( Ex: tools, tractors, machinery, buildings, factories, etc.) Human Capital- Any skills or knowledge gained by a worker through education and experience 18 The Four Factors of Production 4. Entrepreneurship -ambitious leaders that combine the other factors of production to create goods and services. Examples-Henry Ford, Bill Gates, Inventors, Store Owners, etc. Entrepreneurs: 1. Take The Initiative 2. Innovate 3. Act as the Risk Bearers So they can obtain. PROFIT Profit = Revenue -Costs 19 Resources Video 20
6 PPC and PPF Production Possibilities Curve or Production Possibilities Frontier 21 22 23
7 Intro PPC video 24 The Production Possibilities Curve (PPC) Using Economic Models Step 1: Explain concept in words Step 2: Use numbers as examples Step 3: Generate graphs from numbers Step 4: Make generalizations using graph What is the Production Possibilities Curve? A production possibilities curve (or frontier) is a model that shows alternative ways that an economy can use its scarce resources This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 4 Key Assumptions Only two goods can be produced Full employment of resources Fixed Resources (Ceteris Paribus) Fixed Technology 26
8 Production Possibilities Table Bikes A B C D E f 14 12 9 5 0 0 0 2 4 6 8 10 Each point represents a specific combination of goods that can be produced given full employment of resources. Copyright ACDC Leadership 2015 NOW GRAPH IT: Put bikes on y-axis and computers on x-axis 27 Production Possibilities How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? Bikes Impossible/Unattainable A (given current resources) 14 B 12 G 10 C 8 Efficient 6 D 4 Inefficient/ Unemployment 2 E 0 0 2 4 6 8 10 28 Opportunity Cost Example: 1. The opportunity cost of moving from a to b is 2 Bikes 2.The opportunity cost of moving from b to d is 7 Bikes 3.The opportunity cost of moving from d to b is 4 Computer 4.The opportunity cost of moving from f to c is 0 5.What can you say about point G? Unattainable 29
9 The Production Possibilities Curve (or Frontier) Copyright ACDC Leadership 2015 30 Production Possibilities A B C D E CALZONES 4 3 2 1 0 PIZZA 0 1 2 3 4 List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. Constant Opportunity Cost- Resources are easily adaptable for producing either good. Result is a straight line PPC (not common) 31 Production Possibilities A B C D E PIZZA 20 19 16 10 0 ROBOTS 0 1 2 3 4 List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. Law of Increasing Opportunity Cost- As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Why? Resources are NOT easily adaptable to producing both goods. Result is a bowed out (Concave) PPC Copyright ACDC Leadership 2015
10 Constant vs. Increasing Opportunity Cost Identify which product would have a straight line PPC and which would be bowed out? Corn Cactus Copyright ACDC Leadership 2015 Wheat Pineapples Econmovies Episode 3: Monsters Inc. 34 35
11 The Production Possibilities Curve and Efficiency 36 Two Types of Efficiency Productive Efficiency- Products are being produced in the least costly way. This is any point ON the Production Possibilities Curve Allocative Efficiency- The products being produced are the ones most desired by society. This optimal point on the PPC depends on the desires of society. Copyright ACDC Leadership 2015 37 Productive and Allocative Efficiency Bikes Which points are productively efficient? Which are allocatively efficient? A 14 B 12 G 10 8 C 6 E 4 F 2 D 0 0 2 4 6 8 10 Productively Efficient combinations are A through D Allocative Efficient combinations depend on the wants of society (What if this represents a country with no electricity?) 38
12 Why two types of efficiency? Is combination A efficient? Yes and No. It is productively efficient but it is not the combination society wants Size 20 running shoes A Size 10 running shoes 2008 Audit Exam 2008 Audit Exam
13 Shifting the Production Possibilities Curve 42 43 Production Possibilities 4 Key Assumptions Revisited Only two goods can be produced Full employment of resources Fixed Resources (4 Factors) Fixed Technology What if there is a change? 3 Shifters of the PPC 1. Change in resource quantity or quality 2. Change in Technology 3. Change in Trade 44
14 Production Possibilities What happens if there is an increase in population? Pizzas 45 Production Possibilities What happens if there is an increase in population? Pizzas 46 Production Possibilities What if there is a technology improvement in pizza ovens Pizzas 47
15 Production Possibilities What if there is a technology improvement in pizza ovens Pizzas 48 Capital Goods and Future Growth Countries that produce more capital goods will have more growth in the future. Panama Favors Consumer Goods Mexico Favors Capital Goods Capital Goods Current PPC Future PPC Consumer goods Panama Capital Goods Consumer goods Mexico Future PPC Current PPC 49 PPC Practice Draw a PPC showing changes for each of the following: Pizza and (3) 1. New computer making technology 2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows Consumer goods and Capital Goods (4) 4. Destruction of power plants leads to severe electricity shortage 5. Faster computer hardware 6. Many workers unemployed 7. Significant increases in education 50
16 Question #1 New computer making technology A shift only for computers Pizzas 51 Question #2 Decrease in the demand for pizza The curve doesn t shift! A change in demand doesn t shift the curve Pizzas 52 Question #3 Mad cow disease kills 85% of cows A shift inward only for Pizza Pizzas 53
17 Question #4 Destruction of power plants Capital Goods (Guns) Decrease in resources decrease production possibilities for both Consumer Goods (Butter) 54 Capital Goods (Guns) Question #5 Faster computer hardware Quality of a resource improves shifting the curve outward Consumer Goods (Butter) 55 Question #6 Many workers unemployed Capital Goods (Guns) The curve doesn t shift! Unemployment is just a point inside the curve Consumer Goods (Butter) 56
18 Question #7 Significant increases in education Capital Goods (Guns) The quality of labor is improved. Curve shifts outward. Consumer Goods (Butter) 57