-
8/14/2019 Macroeconomics - Arnold - Chapter 2
1/8
An Economys ProductionPossibilities Frontier
Increasing and ConstantOpportunity Costs
The ProductionPossibilities Frontier andVarious
EconomicConcepts
In This Lecture..
In This Lecture..
Exchange or TradeTransaction Costs
ComparativeAdvantage andSpecialization
-
8/14/2019 Macroeconomics - Arnold - Chapter 2
2/8
Production Possibilities Frontier
Represents the possible combinationsof two goods that can be
produced ina certain period of time under theconditions of a given
state oftechnology and fully employedresources.
Production Possibilities FrontierConstant Opportunity Costs
Production Possibilities FrontierIncreasing Opportunity
Costs
-
8/14/2019 Macroeconomics - Arnold - Chapter 2
3/8
Law of IncreasingOpportunity Costs
As more of a goodis produced, theopportunity costsof producing
thatgood increase
IncreasingOpportunity Costs
Production Possibility FrontierFramework for Understanding
-
8/14/2019 Macroeconomics - Arnold - Chapter 2
4/8
Productive Efficiency andInefficiency
Productive EfficiencyThe condition where the maximum output
is
Produced with given resources and technology
Productive InefficiencyThe condition where less than the
maximum
output is produced with given resources and
technology. Productive inefficiency implies that
more of one good can be produced without any
less of another good being produced.
Attainable and Unattainable Regionsand Productive Efficiency
Economic Growth withina PPF Framework
An increase in resources or an advance in
technology can increase the productioncapabilities of an
economy, leading to
economic growth and shift outward in the
production possibilities frontier.
-
8/14/2019 Macroeconomics - Arnold - Chapter 2
5/8
Advance in Technology
An advance in
technology commonlyrefers to the ability toproduce more
outputwith a fixed amountof resources or theability to produce
thesame output withfewer resources.
PPF and Economic Growth
Self Test Questions
1. What does a straight-line production possibilitiesfrontier
(PPF) represent? What does a bowed-outward PPF represent?
2. What does the law of increasing costs have to do
with a bowed-outward PPF?
3. A politician says, If you elect me, we can getmore of
everything we want. Under whatcondition(s) is the politician
telling the truth?
4. In an economy, only one combination of goods isproductive
efficient. True or false? Explain youranswer.
-
8/14/2019 Macroeconomics - Arnold - Chapter 2
6/8
Exchange or Trade
Exchange (Trade)
The process of giving up one thing for something else.
Terms of Trade
How much of one thing is given up for how much of
something else.
Transaction Costs
The costs associated with the time and effort needed to
search out, negotiate, and consummate and exchange.
Exchange or Trade
Third Party Effects (persons not involved in the trade)
Costs - Negative effects of the trade
Benefits Positive effects of the trade
Comparative Advantage
The situation where someone can produce a good at
lower opportunity cost than someone else can.
Specialization
Producing goods in which you have a comparativeadvantage
Self Test Questions
1. What are transaction costs? Are the transactioncosts of
buying a house likely to be greater orless than those of buying a
car? Explain youranswer.
2. Smith is willing to pay a maximum of $300 forgood X, and
Jones is willing to sell good X for aminimum of $220. Will Smith
buy good X from
Jones?
3. Give an example of a trade without third-partyeffects. Next,
give an example of a trade withthird-party effects.
-
8/14/2019 Macroeconomics - Arnold - Chapter 2
7/8
A Timeline for Trade
Ex Ante
Phrase that meansbefore, as in before atrade.
Ex Post
Phrase that meansafter, as in after atrade.
Ex Ante
Elizabeth and Brian Before the Trade
Ex Post
-
8/14/2019 Macroeconomics - Arnold - Chapter 2
8/8
Self Test Questions
1. If George can produce either (a) 10X and 20Y or
(b) 5X and 25Y, what is the opportunity cost toGeorge of
producing one more X ?
2. Harriet can produce either (a) 30X and 70Y or(b) 40X and 55Y;
Bill can produce either (c) 10Xand 40Y or (d) 20X and 20Y. Who has
acomparative advantage in the production of X ?of Y ? Explain your
answers.
Next
