TOPICS
- Society's Economizing
Problem: Production Possibilities
- How to Make Choices: Benefit-Cost Analysis
OUTCOMES
Production
Possibilities
Construct a production
possibilities curve (PPC) when given appropriate data;
what is the production possibilities curve (PPC) or
production possibilities frontier (PPF)?; what does it
show?
What are the assumptions behind
the PPC?
Illustrate the following using the
production possibilities curve:
- we must make
choices
- choices have opportunity costs
- the law of increasing costs
- the effect of unemployment
- the effect of productive inefficiency
- the effect of economic growth
- how present choices affect future possibilities
- the effect of international trade
- it does NOT show the optimum product mix (allocative
efficiency)
Explain WHY the PPC has the shape
that it does -- concave to the origin. What is the law of
increasing cost? Why are there increasing costs? (Draw,
Define. Describe all graphs)
What would the PPC look like if
there were constant costs?
What does a point outside the PPC
represent?
What two things (2 Es) would a
point inside the PPC indicate?
Summarize the general relationship
between investment and economic growth.
Describe the two types of economic
growth ("achieving the potential" and "increasing the
potential") and explain how are they shown on a
PPC?
What would cause a PPC to shift
inward?
Use a PPC to illustrate the effect
of international trade
Benefit Cost
Analysis
define benefit cost
analysis (BCA) and use it to solve problems
define "marginal" and give
examples
define marginal benefits (MB) and
marginal costs (MC)
know what happens if MC increase?
decrease?
know what happens if MB increase?
decrease?
draw MB and MC on a graph and
explain their shapes
be able to find the optimum choice
from a table of total costs and total benefits and from a
table of marginal costs and marginal benefits
what is a "sunk cost" (or fixed
cost) and why are they ignored when using benefit-cost
analysis?
explain why we ignore fixed, or
sunk, costs ("Don't cry over spilt milk."). If you are
deciding whether or not to come to class today, why does
it not matter that you have already paid tuition? Why is
the fact that you have paid tuition irrelevant when
trying to decide whether to attend class today or
skip?
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