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Last Word: Section Review Chapter 1 due Friday

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Opportunity Cost, Specialization, and the PPC

Chapter 1, Section 2Academic Economics

Directions for the simulation

• Assume the role of a farmer– ½ are Farmer A, ½ are Farmer B

• Get a copy of your “Farmers directions”– Examine your goal. Choose a production option.

• Get your potatoes and pineapples from your “farmland” region.

• Trade with the same person every time– After each round, copy down how well you did on the ledger.

• Try to meet your goal by varying your production option

Debrief • How did it feel to be a farmer in region A?– In region B?

• In real life, why might two different areas/countries have different production capabilities?– Can you think of examples?

• How were you able to meet your goal?– Specialization and trade

• Did one group of farmers benefit more from specialization and trade?– Why or why not?

Goals for today

• Understand why specialization and trade are more beneficial than “going it alone”

• Learning what a PPC graph is and how it is used

• Identify the terms opportunity cost, absolute advantage, and comparative advantage.

Production Possibilities Curve/Frontier

• The production possibilities curve shows the maximum combination of goods and services that can be produced from a given amount of resources.

• Classic Example—military spending vs. domestic programs (“guns or butter”)

• Using a production possibilities curve, a producer can decide how to use resources.

Marooned

• Read the story of Selkin and Pirate Jack. As you read, take note of the definitions of the following terms:– Absolute advantage– Comparative advantage– Specialization

• Absolute advantage: the ability to produce more of a good or service than competitors, using the same amount of resources

• Opportunity Cost: the value (or “cost”) of making a choice to produce something different

Specialization: performing only the function that you do best, or hold a comparative advantage in

• Comparative advantage: when one person’s opportunity cost for producing an item is lower than anothers

Rank the top 5 things you would do with an extra hour of time tonight…

• Opportunity cost = The value of the next best alternative to your choice which is given up– All remaining options are “trade-offs”, but next

best to your choice is the opportunity cost