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Becky’s linear production possibilities curve What points
are attainable?
What points are efficient?
Attainable and efficient points Efficient points
Any point on the production possibility curve
These points are efficient, since additional production of one good necessarily means that another good has lower production
Attainable points F/B define an attainable point to be “any
combination of goods that can be produced using currently available resources” (p. 43)
Back to Becky Efficient
points: w, x, y, z, v
Attainable points: t, w, x, y, z, v
Unattainable point: u
Next, let’s look at a two-person economy Suppose
that Barbara and Sherry have the Production Possibility Curves (PPCs) as shown
Next, let’s look at a two-person economy Barbara can
do one of the following: Copy 50 tests
if she does not type letters
Type 25 letters and copy no tests
Something in between
Next, let’s look at a two-person economy Sherry can do
one of the following: Copy 25 tests
and do nothing else
Type 50 letters and do nothing else
Something in between
Opportunity cost How much of one
activity needs to be given up in order to do one more of the other?
Example: Barbara could type one less letter in order to copy two more tests
Absolute advantage and comparative advantage Absolute advantage
“One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person” (F/B p. 36)
Comparative advantage “One person has a comparative advantage
over another if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost” (F/B p. 37)
New example
Productivity in pizza
production
Productivity in salad production
Greg 20 pizzas cooked per
hour
10 salads made per hour
David 16 pizzas cooked per
hour
4 salads made per hour
Drop units to save space Notice that
Greg has absolute advantage in producing both pizzas and salads
However, we will see that each person has a comparative advantage in producing one of the goods
Productivity in pizza productio
n
Productivity in salad
production
Greg 20 / hour 10 / hour
David
16 / hour 4 / hour
Comparative advantage
Before we can determine comparative advantage, we must ask about each person “how much of ____ must I give up in order to produce an additional ____?” In other words, we need to determine
the opportunity cost of making one more pizza or one more salad for both Greg and David
Opportunity cost table
Note that the two numbers in each row are mathematical inverses of each other
Opportunity cost of cooking
a pizza
Opportunity cost of making a salad
Greg ½ salad 2 pizzas
David ¼ salad 4 pizzas
Comparative advantage
To find comparative advantage for each person, find the lowest number in each column
Opportunity cost of cooking
a pizza
Opportunity cost of making a salad
Greg ½ salad 2 pizzas
David ¼ salad 4 pizzas
Comparative advantage
David has comparative advantage in cooking pizzas
Greg has comparative advantage in making salads
Opportunity cost of cooking
a pizza
Opportunity cost of making a salad
Greg ½ salad 2 pizzas
David ¼ salad 4 pizzas
Some things to note
Absolute advantage The same person could have absolute
advantage in everything Comparative advantage in a two-
person, two-good economy Each person will almost always have
comparative advantage in exactly one of the two goods
From Greg and David to a big economy
To produce an efficient point in an economy, each good needs to be produced with lowest opportunity cost
All units in this graph in millions
From Greg and David to a big economy Notice that opportunity cost of pizzas
increases from A to C Opportunity cost increases as more is
produced
All units in this graph in millions
Changes in a production possibilities curve
Some factors that can shift a production possibilities curve Change in population War Investment in buildings, machines,
and other forms of capital Research and development in
technology
From comparative advantage to trade
Recall that Greg had comparative advantage at making salads, while David’s was making pizzas
Greg could make more salads than he wants to eat and trade them for pizzas from David Both can be made better off with
trade
International trade In the real world, trade is more complex
than simple two-good economies When trade becomes more open between
countries, there are typically millions of winners and often only thousands of losers Prices go down for goods on average The few displaced workers must find an
alternate form of work, typically at a lower wage