48economics - CHAPTER 2 Economic Activities Producing and...

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Macroeconomics
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Chapter 9 / Exercise 10
Macroeconomics
Roger A. Arnold
Expert Verified
15 CHAPTER 2 Economic Activities: Producing and Trading Chapter 2 introduces the basics of the PPF, comparative advantage, and trade. This is not exactly a “tools of economics” chapter; instead it explores basic premises that underlie the economic analysis presented throughout the text. KEY IDEAS 1. The PPF is a framework used to examine production. 2. The PPF can be used to demonstrate several economic concepts. 3. The purpose of trade is for people to make themselves better off. 4. Individuals can make themselves better off by specializing in production according to their comparative advantages, and then trading for other goods. CHAPTER OUTLINE I. THE PRODUCTION POSSIBILITIES FRONTIER The production possibilities frontier is a framework in which to examine production; it represents the combination of two goods that can be produced in a certain period of time, under the conditions of a given state of technology and fully employed resources. A. The Straight-Line PPF: Constant Opportunity Costs A straight-line PPF indicates that the opportunity cost of producing additional units of output is fixed. B.The Bowed-Outward (Concave-Downward) PPF: Increasing Opportunity CostsA bowed-outward PPF indicates that the law of increasing opportunity costs holds, that is, for most goods, opportunity costs increase as more of the good is produced. The law of increasing opportunity costs holds because people have varying abilities, so that they aren’t equally adept at producing all goods. C. Law of Increasing Opportunity Costs For most goods, the opportunity costs increase as more of the good is produced. D. Economic Concepts Within a PPF Framework 1. Scarcity
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Macroeconomics
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Chapter 9 / Exercise 10
Macroeconomics
Roger A. Arnold
Expert Verified
16 Chapter 2
2. Productive Efficiency

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