Chapter_2_short_version

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

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TRADE, TRADE-OFFS, TRADE, TRADE-OFFS, AND GOVERNMENT POLICY AND GOVERNMENT POLICY Chapter 2 Chapter 2
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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.
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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
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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.
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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.
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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
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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
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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.
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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
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This note was uploaded on 08/04/2008 for the course ECON 1b taught by Professor Gescke during the Spring '08 term at Foothill College.

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

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