AEM230_Lecture2____Fall_2007 - Lecture 3 BASIC DEFINITIONS...

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1 of Lecture 3 Professor David Lee AEM 230 / ECON 230 BASIC DEFINITIONS (2) Production Possibility Frontier (PPF) : curve showing all possible combinations of outputs of two products that a producer (or economy) can produce with resources fully employed and the best available technology Marginal Rate of Transformation (MRT) : the amount of one product that a producer (or economy) must sacrifice in order to produce one more unit of another commodity (also the slope of the production possibility frontier at the point of production) Marginal Cost of Production (MC): cost of producing an incremental unit of a good or service (equivalent to MRT between 2 goods)
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2 of Lecture 3 Professor David Lee AEM 230 / ECON 230 GAINS FROM TRADE WITH CONSTANT MARGINAL COSTS Each country produces and consumes: Computers Coffee Autarky: U.S. Brazil 20 15 10 20 Constant marginal cost means linear Production Possibility Frontier (slope unchanging)
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3 of Lecture 3 Professor David Lee AEM 230 / ECON 230 PPF US 10 20 40 30 30 10 20 40 Coffee Computers U.S. PPF B R 10 20 40 30 30 10 20 40 Coffee Computers Brazil A B AUTARKY
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Lecture 3 Professor David Lee AEM 230 / ECON 230 GAINS FROM TRADE WITH CONSTANT MARGINAL COSTS Each country produces and consumes: Computers Coffee Autarky: U.S. Brazil
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AEM230_Lecture2____Fall_2007 - Lecture 3 BASIC DEFINITIONS...

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