production possibility frontier_Presentation

production possibility frontier_Presentation - M i c r o...

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Unformatted text preview: M i c r o Production Possibility Frontier M i c r o The Production Possibilities Frontier ◆ Let’s introduce the Production Possibilities Frontier – better known as the PPF. ◆ The PPF is a basic workhorse in economics. ◆ Important for understanding some basic issues in economics. M i c r o The PPF ◆ Great application is with international trade theory. ◆ Helps one understand and distinguish between comparative advantage and absolute advantage. ◆ An important historical figure in all this is David Ricardo. M i c r o David Ricardo ◆ Famous 19th century British economist. ◆ Some consider him the grandfather of international trade theory. ◆ Very influential in pioneering the theory of comparative advantage, inter alia . ◆ Very interesting, very bright guy. ◆ Had a lot of say about the “corn laws” in England. M i c r o The Production Possibility Frontier - What Is It? ◆ The description of the best possible combinations of two goods to produce using all of the available resources. ◆ Shows the trade-off between more of one good in terms of the other. ◆ Assumes: input endowments given, technology given, time given and efficient production. M i c r o Opportunity Cost ◆ The opportunity cost of an activity is the value of the resources used in that activity when they are measured by what they would have produced when used in their next best alternative. ◆ The slope of the Production Possibility Frontier measures the marginal opportunity cost of producing one good in terms of the amount of the other good foregone. M i c r o A Typical PPF Picture Guns Butter unattainable inefficient just attainable just attainable The marginal opportunity cost of guns in terms of butter is increasing as we move down the PPF! The PPF is typically bowed- out or linear. It is not bowed-in M i c r o Comparative Advantage ◆ The person with the lower marginal opportunity cost of an activity has the comparative advantage at that activity. ◆ This means that the person with the comparative advantage can produce the activity by giving up the smallest amount of the alternative activity. M i c r o The Idea of Comparative Advantage and Trade ◆ Specialization and free trade will benefit all trading parties, even when some are “absolutely” more efficient producers than others. ◆ Need to understand absolute vs. comparative advantage. M i c r o Absolute vs. Comparative Advantage Applied to Trade ◆ Absolute advantage : if your country uses fewer resources to produce a given unit of output than the other country. ◆ Comparative advantage : if your country can produce the output at a lower marginal cost in terms of other goods foregone than the other country....
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This note was uploaded on 02/19/2009 for the course ECON 3010 taught by Professor Wissink during the Fall '07 term at Cornell University (Engineering School).

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production possibility frontier_Presentation - M i c r o...

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