ECON1 - Econ 1.28.08 Production possibilities frontier...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 1.28.08 Production possibilities frontier (PPF): Boundary between those combinations of goods and services that can be produced and that cannot Efficiency: Achieved when we cannot produce more of one good without producing less of another good-or by using fewer inputs The production possibility frontier shows all combinations of 2 goods that satisfy efficiency. Opportunity cost-the highest value alternative forgone. Ex. To get fish I have to give up some tapioca. This amount of tapioca given up to obtain fish is the opportunity cost of one fish. Ex.1: Suppose 3 people living on deserted island: with one day they can catch fish or harvest tapioca. Rich very good at fishing: Can catch 5 fish or harvest one pound tapioca Rudy: Can catch 1 fish or harvest 1 pound of tapioca Susan: can catch 1 fish or harvest 5 pounds of tapioca: PPF: Computing opportunity cost from PPF’s What catch: What lost Rich’s OC: of one pd tapioca: 5 fish 1 fish: 1/5 th pd tapioca Susan’s OC: one pd tapioca: 1./5 th fish 1 fish: 5 pds tapioca Rudy’s OC: Tapioca: 1 fish Fish: 1 pd tapioca Comparative advantage- a person has a comparative advantage in the production of a good if he can produce the good at a lower opportunity cost than anyone else Rich has comparative advantage on Fish Susan has comparative advantage on tapioca.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Absolute advantage : If a person can ultimately produce more of the goods than anyone else. In this situation no one has the absolute advantage. Constructing a PPF for a society PPF’s are bowed away from origin As this society moves from complete specialization in fish to complete in tapioca which are comparatively less suited for the harvesting of tapioca must be allocated foe the harvesting of tapioca. This is an illustration of the principle of increasing cost which states that as the production of a good expands the opportunity cost of producing another Example 2: Gervese and colleen are living on a deserted island. With a days worth of labor Gervese can cook 4 pots of rice or catch 4 fish while colleen can cook 6 pots of rice or catch 3 fish. Computing opportunity cost: Colleen: 1 pd of rice: ½ fish One fish: 2 Rice Gervese: 1 pd rice: 1 Fish One fish: 1 Rice
Background image of page 2
Suppose that left to oneself Gervese would cook 2 pots of rice and catch 2 fish and colleen would catch 1 fish and cook 4 pots of rice Rice production Fish production Rice consumption Fish consumption Gervese 2 2 2 2 Colleen 4 1 4 1 Total 6 3 6 3 With Trade: Instead Gervese and Colleen decide to engage in trade They specialize Cook Rice: Colleen Catch Fish: Gervese Rice production Fish production Rice consumption Fish consumption Gervese 0 4 2 2.5 Colleen 6 0 4 1.5 Total 6 4 6 4 They do better with trade than without. Supply Demand framework
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/29/2008 for the course ECON 101 taught by Professor Hansen during the Spring '07 term at University of Wisconsin.

Page1 / 18

ECON1 - Econ 1.28.08 Production possibilities frontier...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online