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Lecture 3:Production, Growth,
and Trade Define production possibility frontier Define production efficiency Choosing Production Mixes An introduction to Growth Work for the Weekend
Read Chapters 3 and 4 Work EIA Chapter 3
MACRO HAPPENS
ECON 111HOFFMAN
Here are some of the issues we will address
Economic growth has made us richer than our grandparents.
Why must we still deal with scarcity? Why are there no “free lunches?” Why is there so much specialization
and trade in the world economy?
MACRO HAPPENS
ECON 111HOFFMAN
The ProductionPossibility Frontier
Production is the conversion of land, labor, capital, and entrepreneurial ability into goods and services.
The production possibilities frontier (PPF) marks the boundary between those combinations of goods and services that can be produced and those that cannot-given available resources.
MACRO HAPPENS
ECON 111HOFFMAN
Tapes Soda(millions (millions of bottles
Possibility per month) per month)
Production Possibilities Frontier
a 0 and 15
b 1 and 14c 2 and 12 d 3 and 9e 4 and 5f 5 and 0
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Tapes (millions per month)
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
0 1 2 3 4 5
5
10
15
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
bS
oda
(mil
lion
s of
bot
tles
per
mon
th)
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Tapes (millions per month)0 1 2 3 4 5
5
10
15 b
c
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)a
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
b
c
d
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
b
c
d
eSod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Tapes (millions per month)0 1 2 3 4 5
5
15a
b
c
d
e
f
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
10
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
b
c
d
e
f
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Attainable
Unattainable
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
b
c
d
e
f
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
MACRO HAPPENS
ECON 111HOFFMAN
Production Possibilities Frontier
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
Attainable
Unattainable
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
b
c
d
e
f
z
MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Costs
Tradeoff Tradeoffs exist when we must give up
something to get something else.
Opportunity Cost All tradeoffs involve a cost — an
opportunity cost.
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ECON 111HOFFMAN
Opportunity Costs
An opportunity cost is the highest valued alternative foregone.
Opportunity costs increase as we desire to produce more tapes.
This explains the shape of the PPF — it is bowed outward.
MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Costs
Increasing Opportunity Cost Opportunity costs tend to increase
because not all resources are equally productive in all activities.
MACRO HAPPENS
ECON 111HOFFMAN
Using Resources Efficiently
Marginal cost The opportunity cost of producing one
more unit of a good or service.
The marginal cost of an additional tape is the quantity of soda that must be given up to get one more tape — the opportunity cost.
MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Cost and Marginal Cost
Tapes (millions per month)
5
10
15a
b
c
d
e
f
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
0 1 2 3 4 5
5
MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Cost and Marginal Cost
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
b
c
d
e
f
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
0 1 2 3 4 5
5
MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Cost and Marginal Cost
a
Tapes (millions per month)0 1 2 3 4 5
5
10
15 b
c
d
e
f
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)Increasing opportunity cost of tapes...
0 1 2 3 4 5
5 MACRO HAPPENS
ECON 111HOFFMAN
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
b
c
d
e
f
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
0 1 2 3 4 5
5
Opportunity Cost and Marginal Cost
Increasing opportunity cost of tapes...
MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Cost and Marginal Cost
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
b
c
d
f
0 1 2 3 4 5
5Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)Increasing opportunity cost of tapes...
e MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Cost and Marginal Cost
Tapes (millions per month)0 1 2 3 4 5
5
10
15a
b
c
d
e
f
0 1 2 3 4 5
5Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)Increasing opportunity cost of tapes...
MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Cost and Marginal Cost
Tapes (millions per month)0 1 2 3 4 5
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)
1
2
3
4
5…means increasingmarginal cost of tapes.
MACRO HAPPENS
ECON 111HOFFMAN
Tapes (millions per month)0 1 2 3 4 5
1
2
3
4
5MC
Opportunity Cost and Marginal Cost
Sod
a (m
illi
ons
of b
ottl
es p
er m
onth
)…means increasingmarginal cost of tapes.
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ECON 111HOFFMAN
Where Should we Produce on a PPF
Any point on the curve is efficient Some choices has implications for
economic well being How should we choose? What Choices are best for Economic
Growth?
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The Cost of Shiftingthe Frontier
If society chooses to allocate resources toward capital investment, fewer goods and services are available for consumption today.
However, more goods and services will be produced in the future.
In General what determines how this choice is made?
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ECON 111HOFFMAN
Factors That Influence Economic Growth
Technological progress is the development of new and better ways of producing goods and services.
Capital accumulation is the growth of capital resources.
does education play a role? does tax policy play a role?
MACRO HAPPENS
ECON 111HOFFMAN
