hi everybody back for part three of chapter two uh thinking like an economist this this part this a set of slides is gonna be a little mathy so i'll go i'll go slow and i hope you'll stick with me and of course if you have any questions please let me know so here we are chapter two again right we've talked about our agenda the first three items we've already uh gone through right economists have to wear two hats they wear sign uh hats scientists had and they were a policy advisor had we talked about models how they are and we looked at our very first model the circular flow diagram we are now in the middle of the production and possibilities frontier and in this set of slides we'll see how that relates to opportunity cost this is what we have been leading up to when we did that whole concept of opportunity cost so how does it work remember uh opportunity cost is what you give up to get something so you have your you're presented with a choice do this or do that well if you do this you give up some of the do that um and as we and that has a real application to economic economics because in our production possibility frontier as we shift resources from one good computers or tomatoes right we are taking those resources away from producing computers and using them to make tomatoes that's okay but we also have to recognize that we are giving up computers when we do that right and this all goes to the notion of trade-offs right because getting more tomatoes means we trade off against the number of computers that we would otherwise make so how does that relate to the ppf well that's really what the ppf is is based upon right the uh the trade-off between those two good so here we have an example okay we are moving away from tomatoes uh to wheat right so here is a ppf that looks at the different combinations of wheat and computers that this economy can make and we looked at it sort of in a general way but here we're going to do the math right so we calculate the trade-off the opportunity cost by looking at the slope of the ppf right so here we have a nice little production possibility frontier that blue line it starts at high and intersects the y-axis at 5000 and ends low and intersects the x-axis at 500 and so we see it's downward sloping right so that again the combination of goods 5 000 wheat and zero computers all the way down to zero wheat and 500 computers now how do we go how do we calculate the slope as we and the opportunity cost as we move away from all wheat and no computers to all computers and no wheat well we look at uh there are two ways to do it right in the book mancu uses this way his way and uh over time i think comp students have been a little bit confused by that so i developed my own way so we'll go through both and i'm going to argue why mine is better right so there are two ways to calculate the ppf mancus way he uses the traditional geometric uh calculation where he looks at this thing called the rise over the run the slope of a line in his um explanation talks about this thing rise over the run right so what's the rise it's the the distance that the slope the line falls or rises as we move from one point to another right so from here we're going from 5 000 tons of wheat and zero computers to let's say 4 000 tons of wheat to 100 computers right so we're going to end up where that purple arrow hits the blue line again right so how much the did the line fall well it went from five thousand to four thousand so the rise is negative in this case we're going down and the rise is one thousand we that's the top part of our fraction the bottom part of our fraction the denominator is what we call the run so how much did we move to the right horizontally from zero computers in our case to a hundred computers in our case so the run is that 100 unit change that's our denominator all right so in mankind's view the slope of that line is one thousand on uh minus one thousand because we're going down um divided by a hundred or minus ten now in real life we forget about the ten the minus part and we'll just say 10. and so in his calculation the opportunity cost of a computer is 10 tons of wheat we'll explain more in clearer language in a minute what that means well why not do it now right so it means that if we want to make one computer we have to give up that's our opportunity cost that's our trade-off we have to give up 10 tons of wheat okay so that's his way my way is a little different to me it's a little easier so i ask the question where do we start and where do we end up and when we're doing these kinds of calculations it's easiest to start at the extreme values right where the lines intersect the axes right so one intersection is the point 5000 wheat and zero computers let's call it point a and the other extreme value inter intersection is point b where we have zero wheat and 500 computers right so it's just easier to do the math that way right so let's suppose that our country produces all wheat and no computers at point a and it wants to go all the way it completely changes its uh economic perspective and it wants to produce all computers and no we it goes down to poor to point b obviously because of the trade-off there we're going to produce less sweet uh and produce more computers and that's okay i mean whoever decides these things decides that has decided that's an acceptable trade-off right so we're going from point a to point b right so when you're calculating the opportunity cost in my uh strategy right ask yourself what do we give up and what do i get so i replace the give up and get with that rise over run stuff just i think a little easier for people to understand right so what do i give up what do i get in this case well if i'm going from point a with five thousand wheats and zero computers to zero weeks and five hundred computers i give up five thousand weeks right so that's the numerator of my fraction on the other hand what do i get well i get i used to have or be able to make zero computers now i can make 500 computers so i get 500 computers voila this is the way this is my way of calculating opportunity cost i think it's better because it it um works in both directions if i'm going from wheat to computers or computers to wheat the my way works a little better mancus is a little harder to get there you can but it's a little harder to get there when you use his way so i think students in the past have liked my way better right so again we give up 5 000 tons of wheat to get 500 computers let's look at the formula it's it's simple right the numerator our fraction which is all designed to calculate opportunity cost is what we give up on the top right what we gain divided by what we gain on the bottom so in our case we give up 5 000 tons of wheat we get 500 computers right so our opportunity cost is 10 or again we're gonna that fraction is going to give you a negative number forget about that forget about the negative sign just use the uh absolute value so in our case the opportunity cost of computers is 10. that's the same answer as we got before which tells us what how many tons of wheat we need to give up to to make one more computer right so i like to say i talked about this in our zoom session once but i like to say um if we were in class and you were giving me that answer i would say okay what does that mean in real life my favorite professor from my graduate program used to make us yell at us she said she'd say explain this to your mother all right my mother is smart right but she doesn't know about opportunity course so i had to come up with simple everyday language to explain that to her and i think that's a good way for you guys to understand it my view is if you can't explain this to your mother you don't understand it right so bringing it to this this uh issue here right so number 10 the opportunity cost tells us for every computer our country wants to produce it must give up 10 tons of wheat so opportunity some cost sometimes gives people a lot of trouble they get all wound up in it it's simple it's that it calculates the trade-off it tells us the trade-off as we go from more of one good to more of another good what do we give up of good one here in this case we're giving up 10 tons of wheat as we want to make one more computer right let's practice all right so here we have this is a new problem right we've got two countries france and england they both make the same products wine and cloth right so france you can see the combinations there if it has lots of choices of uh the combinations of each goods so what are our extremes our extreme for francis they can choose to make 600 wines and but if they do they'll make zero cloth that they could also make at the other extreme 300 cloths but if they do that they'll make zero wines right england looks a little different right to the right they can choose to make 200 wines but if they do they'll make zero cloths they could also make choose to make 300 cloths and if they do they'll make zero wines right so those are the production possibility frontiers for each country all right so the question here is what is in which country is the opportunity cost of cloth lower so what are we looking for here we're looking for as we make one more cloth what how much wine does that country have to give up right so again what how much wine do we give up if we make one more cloth and we'll see when we do the numbers right that the opportunity cost of cloth is different in each country let's do them one at a time right so let's see in france right again use my extreme value method right and look at what we give up divide about what we get right so france if we go from 600 wines to zero cloth or all the way down to 300 wines and zero cloth what are we giving up we're giving 600 up 600 wines but we're getting 300 cloths right so the the opportunity cost in france of cloth is what two wines right that is the slope coincidentally the slope of the ppf in france for england it's different right so if we're going from 200 wines in zero cloth to 300 cloths and zero wines well what are we giving up we're giving up 200 wines but we're getting the denominator 300 cloths so this the opportunity cost in england of cloth is two-thirds wines not two right that is the slope of the production possibility frontier for england so what does that mean that means that in england it's cheaper to make cloth than in france well how do i know that because england has to give up less wine two-thirds of a wine for every unit of cloth where in france i have to give up two wines much more right so england is um well i don't want to jump the gun right the opportunity cost in in england to make cloth is lower it tells us something and we'll talk about that in the third chapter which is next for us right but it's good enough for now for us to be able to calculate the opportunity cost in each of these countries right so that's it that's the opportunity cost that's the simple ppf thing a couple other things i want to mention right so the ppf as we've seen sort of is just the line that sits there but doesn't always have to sit in the same place it can move it can go out it can go in right so here's a case where the production possibility frontier started at the black line but has moved to the red line how does how would that be possible well remember our our definition right the production possibility frontier shows the combination of goods and services that an economy can produce given the resources and technology available to it that implies that it can change how could it change if i give the economy more stuff to work with right more more resources more people instead of having a line of 50 000 people i have a line of 60 000 workers looking for something to do right now i've given the economy more resources we can expect our combination of goods to change as well go out instead of giving them giving the economy more people to work with i can give them better machines right instead of growing tomatoes using a stick that you scratch in the ground and put the seeds in right what if i give the people working there a shovel or a tractor even right they have more technology so the same person can make more stuff the same as we say in economics the same person is more productive right so we would expect that same person to produce more tomatoes than before what have i done i've shifted my ppf outwards okay another thing to know and i'm don't get all don't get worried about this but we can also i want to also point out that the pvfs that we've looked at so far are have all been a straight line but they don't have to be they can be straight or they can be as is more common bow shaped it looks like a quarter circle right it looks and and i don't want to do that in our class because to calculate the slope of that ppf we need a little calculus and that's not something we require in this course so we're not going to look at that in the in quizzes but just know that they a ppf does not have to be straight it could be look like that circle and why does that hap how does that happen because the opportunity cost of moving from one good to another might change uh depending on the combination of goods right so if we go from zero wines and uh and 500 computers to 500 5000 wines and zero computers that trade-off right the opportunity cost of going from one point to the other might change depending on the resources you throw at it right and that's going to produce a bow shaped ppf instead of a straight line right um there we go right so right there you go so the good the good gets relatively more expensive or cheaper to produce depending on where you move along the ppf so that gives us that quarter circle that bow shaped ppf instead of a straight line don't worry about this not on quizzes right or if it is on quizzes it's going to be very easy for you to figure out so we don't have to calculate slopes of of beauche ppf's that's just that's calculus and we don't do that all right so that's the end of chapter two what do we know about the ppf right remember let's go back to our definition a ppf shows all combinations of the two of two goods that an economy can produce that should not does but can produce given the resources and technology available to it right it's a very valuable model for us because we you can use it to show trade-offs and opportunity costs faced by these economies right and that's it that's chapter three so i will be back at you shortly with chapter i'm sorry that's chapter two we'll be back at you shortly with chapter three which shows how we apply the concepts we learn about our pps and opportunity costs to look at trade between two countries all right see you soon