Chapter 2 notes - Chapter 2 Trade-Offs Comparative...

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Chapter 2 Trade-Offs, Comparative Advantage, and the Market System When BMW decided to advertise in the Chinese market, it became the company’s 8 th largest market. Building factories in other countries has two benefits: o The lower wages paid to workers in other countries reduce the cost of manufacturing \vehicles. o BMW can reduce political friction by producing vehicles in the same country in which they sell them. The decisions managers face reflect the key fact of economic life: scarcity. o Scarcity requires trade-offs. The situation in which unlimited wants exceed the limited resources available to fulfill those wants. Goods and services and factors of production are scarce. o Workers, capital, natural resources, and entrepreneurial ability. One key activity that takes place in markets is trade. By engaging in trade, people can raise their standard of living. Trade involves the decisions of millions of households and firms spread around the world. Production Possibilities Frontiers and Real-World Trade-offs Production Possibilities Frontier : a curve showing the maximum attainable combinations of two products that may be produced with available resources. Graphing the PPF All the combinations either on the frontier or inside the frontier are attainable . Combinations on the frontier are efficient because all available resources are being fully utilized and the fewest possible resources are being used to produce a given amount of output. Combinations inside the frontier are inefficient because maximum output is not being obtained from the available resources. Points beyond the PPF are unattainable given the firm’s current resources. If the company is at a point on the PPF, the only way to produce more of one item is to produce less of the other. Opportunity Cost : the highest valued alternative that must be given up to engage in that activity. Trade-Offs and Tsunami Relief There were sharp declines in donations to the homeless and the poor as donors gave funs for tsunami relief instead. Increasing Marginal Opportunity Costs The PPF is bowed outward, rather than a straight line. o As the economy moves down the PPF, it experiences increasing marginal opportunity costs because increasing automobile production by a given quantity requires larger and larger decreases in tank production.
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