Chapter_2_short_version - Chapter 2 TRADE TRADE-OFFS AND...

TRADE, TRADE-OFFS,
TRADE, TRADE-OFFS,
AND GOVERNMENT POLICY
AND GOVERNMENT POLICY
Chapter 2
Chapter 2

2-2
The Production
The Production
Possibilities Model
Possibilities Model
•
A production possibilities curve
illustrates opportunity cost. It shows
trade-offs among choices we make.
•
It measures the maximum number of
outputs that can be achieved from a
given number of inputs.

2-3
A Production Possibilities
A Production Possibilities
Curve for an Individual
Curve for an Individual
Economics grade
100
88
70
46
40
58 66 78 94 98
History grade
20 hours of
history
0 hours of
economics
E
D
C
B
20 hours of economics
0 hours of history
A
Hours of study
in history
Grade in
history
Hours of study
in economics
Grade in
economics
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
68
66
64
62
60
58
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
40
43
46
49
52
55
58
61
64
67
70
73
76
79
82
85
88
91
94
97
100

2-4
The Production Possibility
The Production Possibility
Curve for an Individual
Curve for an Individual
•
The production possibilities curve
demonstrates that:

There is a limit to what you can achieve,
given the existing institutions,
resources, and technology

Every choice made has an opportunity
cost – you can get more of something
only by giving up something else.

2-5
Production Possibility
Production Possibility
Curve for a Society
Curve for a Society
•
The production possibility curve (PPC)
is bowed outward showing that
opportunity costs increase as more of
one good is produced.
•
Opportunity costs increase because of
comparative advantage – some
resources are better suited for the
production of some goods than others.

2-6
A Production Possibilities
A Production Possibilities
Table for Society
Table for Society
% of resources
devoted to
production
of guns
Number
of guns
% of resources
devoted to
production
of butter
Pounds
of butter Row
0
20
40
60
80
100
0
4
7
9
11
12
100
80
60
40
20
0
15
14
12
9
5
0
A
B
C
D
E
F

2-7
PPC for Society
PPC for Society
12 11
A
Butter
Guns
4 7 9
0
1 gun
5 pounds
of butter
5
9
15
3 guns
2 pounds
of butter
B
C
D
E
F
14
12
4 guns
1 pound
of butter

2-8
Increasing Marginal
Increasing Marginal
Opportunity Cost
Opportunity Cost
Butter
Slope is flat at A. Low
opportunity cost of guns.
Slope is steep at B. High
opportunity cost of guns.
Guns
B
A
The principle of increasing marginal
opportunity cost states that opportunity costs
increase as you produce more of one product.

2-9
Efficiency and Inefficiency
Efficiency and Inefficiency
•
Productive efficiency – achieving as
much output as possible from a given
amount of resources – occurs at any
point on the PPC.
•
Any point within the PPC represents
inefficiency .
•
Any point outside the PPC is
unattainable, given present resources
and technology.

2-10
Efficiency and Inefficiency
Efficiency and Inefficiency
Guns
10
8
6
4
2
0
2 4 6 8 10
Butter
C D
A
B
Efficient
points
Inefficient
point
Unattainable point,
given available technology,
resources and labor force

2-11
Shifts in the PPC
Shifts in the PPC
•
Society can produce more output if:
