AP Economics Lesson Plan Individual Choice, Incentives and Marginal ...

AP Economics Lesson Plan Individual Choice, Incentives and Marginal Analysis

Learning Targets:

1. Explain the concept of opportunity costs and apply it to personal decisions 2. Explain what a production possibilities curve illustrates 3. Apply marginal analysis to real-life scenarios 4. Explain the difference between absolute and comparative advantage 5. Calculate comparative advantage based on opportunity costs

Textbook Chapter: Chapter 1: First Principles (pgs. 6-9); Chapter 2: Economic Models (pgs. 24-34)

1. WARM-UP: Give an example of an opportunity cost from the past few days.

2. Economics is about the study of SCARCITY and CHOICE a. We have unlimited needs and wants but limited resources b. We cannot have everything we want c. Requires us to make trade-offs (otherwise known as OPPORTUNITY COSTS)

3. Limited resources means we have to decide "how much?" of something to produce or consume a. Decisions are made on "the margin" b. Every decision has both a cost and a benefit c. The MARGINAL COST of something is how much it costs for one more unit d. The MARGINAL BENEFIT is how much more enjoyment I get out of one more unit

4. EXAMPLE: Applying marginal analysis to going to the movies a. ASK: Would you go to the movie for a third time? Why or why not? b. You would not go because you only get $5 of benefit out of the movie but it costs you $10 go go

5. When making trade-offs we need a model to work from...one model is the PRODUCTION POSSIBILITIES CURVE (PPC) or PRODUCTION POSSIBILITIES FRONTIER (PPF) a. Looks at trade-offs between the production of 2 different products b. EXAMPLE: Production of Army trucks versus personal automobiles i. What trade-offs are represented in the curve? Trucks versus cars ii. What is another term for trade-offs in economics? Opportunity cost iii. How many cars can we produce? 3 iv. How many trucks can we produce? 12 v. What is the opportunity cost of moving from Point A to Point B? 2 trucks vi. What is the opportunity cost of moving from Point B to Point C? 4 trucks vii. What might Point B (along the curve) indicate? We are producing as much as possible (EFFICIENCY) viii. What might Point F indicate (inside the curve)? We could produce more of one or both products ix. What might Point E indicate (outside the curve)? We cannot produce that amount with current resources and technology c. ASK: What might cause the PPC to move outward? An increase in the factors of production (land, labor and capital) or a change in technology.

6. ASK: Why might trade help improve our lives? a. No trade limits us to what we can make on our own b. Trade allows us to take advantage of other people's skills to produce more than on our own. c. We end up with MORE of everything than on our own

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8. EXAMPLE: A fish story ...

a. The opportunity cost of 1 unit of fish for England is 20 chips per 80 fish = 20/80 = 1/4 chips.

b. The opportunity cost of 1 unit of chips for England is 80 fish per 20 chips = 80/20 = 4 fish

c. The opportunity cost of 1 unit fish for the U.S. is 50/100 = 1/2 chips

d. The opportunity cost of 1 unit of chips for the U.S. is 100/50 = 2 fish e. The U.S. has an ABSOLUTE ADVANTAGE in both fish and chips (they produce more of both than

England) f. England has an absolute advantage in nothing.

g. The U.S. has a COMPARATIVE ADVANTAGE in the production of chips (the opportunity cost is lower

for the U.S. than England)

h. England has a comparative advantage in the production of fish.

i. The complete chart looks like this ...

Without Trade

With Trade (Production)

With Trade (Consumption)

Fish

Chips

Fish

Chips

Fish

Chips

England

20

15

80

0

25

20

United States

50

25

0

50

55

30

Total

70

40

80

50

80

50

9. ASK: Are both countries better off from trade? Yes. They both can consume more of each item than they could before.

10. EXAMPLE: Imagine the case of a Brad and Angelina a. ASK: Who has an absolute advantage in mowing lawns? Brad b. ASK: Who has an absolute advantage in preparing meals? Brad

11. PAIRS: Work together to determine the following: a. What is Brad's opportunity cost when making a meal? 2 lawns b. What is Angelina's opportunity cost when preparing a meal? 3 lawns c. What is Brad's opportunity cost when mowing a lawn? 1/2 meal d. What is Angelina's opportunity cost when mowing a lawn? 1/3 meal e. Who has the absolute advantage in mowing lawns? Brad f. Who has a comparative advantage in mowing lawns? Angelina. g. Who has the absolute advantage in preparing meals? Brad h. Who has a comparative advantage in preparing meals? Brad i. Who should do which chore? Base your answer on comparative advantage considerations? Brad should prepare meals since he loses only 2 lawns when does so while Angelina loses 3 lawns. Angelina should mow lawns because she forgoes only 1/3 of meal while Brad loses 1/2 of a meal.

Concepts to Focus on in Class 1. Why MB = MC is optimal 2. How to calculate opportunity cost

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