Ch 3 outline - Chapter 3 outline: I. A Parable for the...

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Chapter 3 outline: I. A Parable for the Modern Economy A. Example: two goods—meat and potatoes and two people—a cattle rancher and  a potato farmer (each of whom like to consume both potatoes and meat). 1. The gains from trade are obvious if the farmer can only grow potatoes  and the rancher can only raise cattle. 2. The gains from trade are also fairly obvious if, instead, the farmer can  raise cattle as well as grow potatoes, but he is not as good at it and the  rancher can grow potatoes in addition to raising cattle, but her land is not  well suited for it. 3. The gains from trade are not as clear if either the farmer or the rancher is  better at producing both potatoes and meat. B. Production Possibilities 1. The farmer and rancher both work 8 hours per day and can use this time  to grow potatoes, raise cattle, or both. 2. Table 1 shows the amount of time each takes to produce 1 ounce of  either good: Minutes Needed to Make  1 Ounce of: Amount Produced in 8 Hours Meat Potatoes Meat Potatoes Farmer 60 min./oz. 15 min./oz. 8/1=8 oz. 8/0.25=22 oz. Rancher 20 min./oz. 10 min./oz. 8/0.33=24 oz. 8/0.16=48 oz. 3. The production possibilities can also be graphed. a. These production possibilities frontiers are drawn linearly instead  of being bowed out.  This assumes that the farmer's and the  rancher's technology for producing meat and potatoes allows  them to switch between producing one good and the other at a  constant rate.
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b. As we saw in Chapter 2, these production possibilities frontiers  represent the principles of tradeoffs and opportunity costs. 4.
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This note was uploaded on 08/31/2009 for the course EC 350 taught by Professor Sekelj during the Spring '08 term at Clarkson University .

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Ch 3 outline - Chapter 3 outline: I. A Parable for the...

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