Embed Size (px)
Citation preview
1
Chapter 2Chapter 2Chapter 2Chapter 2Production Possibilities Production Possibilities and Opportunity Costsand Opportunity Costs
2
What is a Production What is a Production Possibilities Frontier (PPF)?Possibilities Frontier (PPF)?
What is a Production What is a Production Possibilities Frontier (PPF)?Possibilities Frontier (PPF)? A graph that shows the maximum
combinations of goods that can be produced when resources and technology are used efficiently
©©1999 South-Western College Publishing
3
For simplicity, lets take For simplicity, lets take a world with only 2 a world with only 2
productsproducts
For simplicity, lets take For simplicity, lets take a world with only 2 a world with only 2
productsproductsLets use cola and pizza (a typical
college campus?)
4
A typical PPF has the following shape:A typical PPF has the following shape: ..A typical PPF has the following shape:A typical PPF has the following shape: ..
Pizza
co
la
The curve has a negative slope.The curve is concave to the origin.
5
All points on the curve correspond to All points on the curve correspond to full use of resources.full use of resources.All points on the curve correspond to All points on the curve correspond to full use of resources.full use of resources.
Pizza
co
la A
B
6
Points outside the the PPF are not Points outside the the PPF are not feasible with existing resources.feasible with existing resources.Points outside the the PPF are not Points outside the the PPF are not feasible with existing resources.feasible with existing resources.
Pizza
co
la .A
7
Periods of unemployment or inefficiency in Periods of unemployment or inefficiency in production correspond to points under the production correspond to points under the PPF.PPF.
Periods of unemployment or inefficiency in Periods of unemployment or inefficiency in production correspond to points under the production correspond to points under the PPF.PPF.
Pizza
co
la
.A
8
Shape of the PPF? Why Shape of the PPF? Why Concave?Concave?
Shape of the PPF? Why Shape of the PPF? Why Concave?Concave?
If PPF a straight line, we have constant opportunity costs
If PPF concave, we have increasing opportunity costs
9
Consider a straight line PPFConsider a straight line PPFConsider a straight line PPFConsider a straight line PPF
cola
Pizza
Beer given up, the opportunity cost, remains constant
10
Concave shape, increasing opportunity Concave shape, increasing opportunity costs.costs.Concave shape, increasing opportunity Concave shape, increasing opportunity costs.costs.
Pizza
co
laBeer given up, the opportunity cost, is increasing
11
What is the Law of What is the Law of Increasing Costs?Increasing Costs?
What is the Law of What is the Law of Increasing Costs?Increasing Costs?
The opportunity cost of producing a good increases as more of the good is produced
©©1999 South-Western College Publishing
12
Why does the Law of Why does the Law of Increasing Opportunity Increasing Opportunity
costs hold?costs hold?
Why does the Law of Why does the Law of Increasing Opportunity Increasing Opportunity
costs hold?costs hold?Because resources are not
perfectly adaptable to all products
13
How do we have How do we have more of everything?more of everything?
How do we have How do we have more of everything?more of everything?
By increasing our resources
©©1999 South-Western College Publishing
14
Economic growth indicates an increase in the total output of an economy.
Pizza
co
la
.A
The PPF shifts to the right !
15
Causes of rightward Causes of rightward shifts in PPF’s?shifts in PPF’s?
Causes of rightward Causes of rightward shifts in PPF’s?shifts in PPF’s?
Increase in resourcesIncreased productivityImproved technology
16
Can a PPF shift inward Can a PPF shift inward (to the left)?(to the left)?
Can a PPF shift inward Can a PPF shift inward (to the left)?(to the left)?
YES!! For just the opposite reasons as an outward shift such as a loss of resources
17
Economic growth and the Capital Consumer goods
tradeoff:
Consumer goods
Cap
ital
go
od
s A
B
From which point would an economy grow faster, A or B?? Answer is A, with more capital goods
18
What should a country What should a country specialize in producing?specialize in producing?What should a country What should a country
specialize in producing?specialize in producing?In those goods and
services that it has a comparative advantage
©©1999 South-Western College Publishing
19
What is What is Comparative Advantage?Comparative Advantage?
What is What is Comparative Advantage?Comparative Advantage?A country’s ability to
produce a good at a lower opportunity cost than the country which it trades
©©1999 South-Western College Publishing
20
What is What is Absolute Advantage?Absolute Advantage?
What is What is Absolute Advantage?Absolute Advantage?
A country’s ability to produce a good using fewer resources than the country with which it trades
©©1999 South-Western College Publishing
21
Example, 2 people, 2 jobs, time Example, 2 people, 2 jobs, time requiredrequired
Example, 2 people, 2 jobs, time Example, 2 people, 2 jobs, time requiredrequired
Job A Job B
Judy
Sam
60 min. 75 min
90 min 150 min
22
In the table, Judy is absolutely advantaged at both tasks, but what is her comparative advantage? What is Sam’s comparative advantage?
23
Judy’s comparative advantage is at job B, and Sam’s comparative advantage is at job A
To see why, look at the ratios in the table- Judy can do job A in 2/3 the time of Sam, but she can do job B in ½ the time, so she is relatively more efficient at job B.
24
Theory of comparative Theory of comparative advantageadvantage
Theory of comparative Theory of comparative advantageadvantage
Argues that output is greater when resources tend to specialize in their greatest comparative advantages
25
ProblemProblemProblemProblemWith the same quantity of resources,
Euphoria can produce 100 barrels of beer to Extasia’s 50 barrels, and Euphoria can produce 150 pizzas to Extasia’s 100. According to comparative advantage, what product should Extasia tend to specialize in? What about Euphoria?
26
ANSWER:
Extasia should specialize in pizzas, Euphoria in beer production
27
• What are Factors of Production?• What is Production Possibilities?• Why does division of labor increase
productivity?• What is an Opportunity Cost?• What is Comparative Advantage?• What is Absolute Advantage?
