Macroeconomics Chapter 2 Notes.docx - Macroeconomics Notes Chapter 2 2.1 Upon completing this lesson you should be able to 1 Calculate opportunity cost

Macroeconomics Chapter 2 Notes.docx - Macroeconomics Notes...

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Macroeconomics Notes: Chapter 2 2.1 Upon completing this lesson, you should be able to: 1. Calculate opportunity cost 2. Determine comparative advantage between two countries 3. Discuss the advantages and disadvantages of free trade 4. Describe in economic terms what is meant by the statement "there is no such thing as a free lunch" 5. Calculate real wages 6. Discuss the differences between exante and expost decisions. Ex Ante decisions are before based on expectations. Ex Post are After with perfect information. When you make bad decisions they are usually based off of uncertainty. 7. Apply marginal analysis to simple economic decisions 8. Create normative and positive economic statements Production Possibilities Frontiers and Opportunity Costs Production Possibilities Frontier (PPF) is a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. The Tesla example, the company only produces Model S Sedans and Model X SUV’s at the Fremont plant, using workers, materials, robots and other machinery. Think Harley-Davidson Model Mix planning to 700 motorcycles per shift. Points on the curve would be the optimal model mix are on the frontier. Inside the frontier, or under the curve, are attainable and 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. A model mix inside the frontier (inside the curve) are inefficient because maximum output is not being obtained from the available resources such as the assembly line not operating at its capacity. Model mix points beyond the production possibilities frontier (or outside the curve) are unattainable given the firm’s current resources. These points are more units than would normally be produced total. To produce these, more machines or more workers may be needed. The opportunity cost for Tesla’s example is for one more Model S, it is one fewer Model X produced. Recall from Chapter 1 that the opportunity cost of any activity is the highest-valued alternative that must be given up to engage in that activity. Tesla's Production Choices at its Fremont Plant
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Choic e Qty of Sedans Produced Qty of SUVs Produced A 80 0 B 60 20 C 40 40 D 20 60 E 0 80 SEE SOLVED PROBLEM 2.1 on page 40 for Drawing a Production Possibilities Frontier for Tesla. Increasing Marginal Opportunity Costs We can use the production possibilities frontier to explore issues concerning the economy as a whole. Suppose we divide all the goods and services produced in the economy into just two types: military goods and civilian goods. In the below graph, we let tanks represent military goods and automobiles represent civilian goods. 400 tanks can be produced in one year. If all resources are devoted to producing civilian goods, 500 automobiles can be produced in one year. Devoting resources to producing both goods results in the economy being at other points along the production possibilities frontier
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