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If you know the rules of the game, do you stand a better chance of winning?
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What Do You Make Choices About Every Day?
• How do you make good decisions on what to do and how to do it?
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We constantly make decisions in lives. As the world becomes more complex and more choices are available, decision-making can becomes very difficult. We can allow ourselves to be overwhelmed and let life make our decisions. I usually feel that the fewer choices I have, the easier and more effectively I can make a decision. How do I reduce the range of choices I have so that I am less harried about making a decision? At this point, think how much easier it would be to make decisions if we had a tool to help simplify matters
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When I go the store, I see hundreds of items arranged to catch my attention.
And then I see something that I think is really interesting! Should I buy it, should I shop around elsewhere for it, is it good value for money, what am I going to do with it? … I just can’t make up my mind.
Economics has a simple tool! I draw a mental box just like on page 20! Is this a need or a want? What value it will bring to my life: high or low? If the value is high and it is a need, then I buy it. If the value is low and it is a want, then I don’t bother with it. If the value is low but it is a need, then I might shop around for it. If the value is high and it is a want but not a need, then I might consider treating myself to it. Therefore, I essentially break down a decision into simple terms that help me make up my mind.
This is simplified Cost-Benefit Analysis!
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The Production Possibilities Frontier is the second model Economists use.• The Production Possibilities Frontier is
also known as the PPF.• The PPF is a basic workhorse model in
economics.
Important for understanding some basic issues in economics.
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The PPF helps to illustrate many
concepts. • Concepts Illustrated by the Production
Possibilities Frontier • Scarcity• Efficiency• Tradeoffs• Opportunity Cost• Economic Growth
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The Production Possibility Frontier - What Is It?
• The description of the best possible combinations of two goods to produce using all of the available resources.
• Shows the trade-off between more of one good in terms of the other.
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Production Possibilities Frontier
A B C D E F G
units of potatoes
6 5 4 3 2 1 0
units of apples
0 1 2 3 4 5 6
Production Possibilities FrontierProduction Possibilities Frontier
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units of potatoes
units ofapples
A B C D E F G
units of potatoes
6 5 4 3 2 1 0
units of apples
0 1 2 3 4 5 6
6
5
4
3
2
1
1 2 3 4 5 6
A
B
C
D
E
F
G
Production Possibilities Frontier
Production Possibilities Frontier
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units of potatoes
units ofapples
6
5
4
3
2
1
1 2 3 4 5 6
A
B
C
D
E
F
G
Constant Cost
One unit of apples costs one unit of potatoes.
One unit of potatoes costs one unit of apples.
Production Possibilities Frontier
Production Possibilities Frontier
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units of potatoes
units ofapples
12
10
8
6
4
2
1 2 3 4 5 6
A
B
C
D
E
F
G
Constant Cost
What if? One unit of apples costs two units of potatoes?
One unit of potatoes costs one-half unit of apples.
Production Possibilities FrontierProduction Possibilities Frontier
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units of potatoes
units ofapples
6
5
4
3
2
1
1 2 3 4 5 6
A
B
C
D
E
F
G
I
Production Possibilities FrontierProduction Possibilities Frontier
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units of potatoes
units ofapples
6
5
4
3
2
1
1 2 3 4 5 6
A
B
C
D
E
F
G
I
Can this society produce at production combination H?
H
Production Possibilities Frontier
Production Possibilities Frontier
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Events that can expand production possibilities outward…
•A technological advance
• rail cars• refrigeration• computers
•An increase in human or natural resources
• population increase• new discoveries
•Capital investment
• new factories• new infrastructure
Production Possibilities FrontierProduction Possibilities Frontier
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units of capital goods
units ofconsumer
goods
6
5
4
3
2
1
1 2 3 4 5 6
A
B
C
D
E
F
G
Production Possibilities Frontier
One unit of capital goods costs one unit of consumer goods.One unit of consumer goods costs one unit of capital goods.
Production Possibilities FrontierProduction Possibilities Frontier
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Is knowing something about Economics valuable in your daily life? Do you make decisions daily?
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• Microeconomics focuses on the individual parts of the economy• How households and firms make decisions and how they
interact in specific market settings.
• Macroeconomics looks at the economy as a whole.• Economy-wide phenomena, including inflation,
unemployment, and economic growth.
Microeconomics and Macroeconomics
