Ch3___PPF__CompAdv__GainsFromTrade__Handouts_

Ch3___PPF__CompAdv__GainsFromTrade__Handouts_ - The...

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Unformatted text preview: The Economic Problem CHAPTER 3 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Explain and illustrate the concepts of scarcity, production efficiency, and tradeoff using the production possibilities frontier. 2 Calculate opportunity cost. 3 Explain what makes production possibilities expand. 4 Explain how people gain from specialization and trade. Ex 3.A - BMW faces a production trade-off at the Spartanburg plant. Z4 ROADSTER X5 SUV How many vehicles can the factory produce given the fixed resources? What trade-off does the plant manager face? Is their production decision unattainable? Is it efficient? Can we expand production possibilities? 3 3.1 PRODUCTION POSSIBILITIES ! Production Possibilities Frontier Production possibilities frontier The boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology. The PPF is a valuable tool for illustrating the effects of scarcity and its consequences. 4 3.1 PRODUCTION POSSIBILITIES Figure 3.1 shows the PPF for cell phones and DVDs. Each point on the graph represents a column of the table. The line through the points is the PPF PPF . 3.1 PRODUCTION POSSIBILITIES The PPF puts three features of production possibilities in sharp focus: Attainable and unattainable combination • Attainable and unattainable combinations • Efficient and inefficient production • Tradeoffs and free lunches Tradeoffs and free lunches 7 3.1 PRODUCTION POSSIBILITIES Attainable and Unattainable Combinations Because the PPF shows the limits to production, it separates attainable combinations from unattainable ones. Figure 3 2 on the next slide illustrates the attainable and Figure 3.2 on the next slide illustrates the attainable and unattainable combinations. 8 3.1 PRODUCTION POSSIBILITIES We can produce at any point inside the PPF or on We cannot produce at any the frontier. point outside the PPF such as point G . The PPF separates attainable combinations from unattainable combinations. 3.1 PRODUCTION POSSIBILITIES Efficient and Inefficient Production Production efficiency is a situation in which we cannot produce more of one good or service without producing less of something else. Figure 3.3 on the next slide illustrates the distinction between efficient and inefficient production. 11 3.1 PRODUCTION POSSIBILITIES 1. When production is on the PPF , such as at point E or D , production is efficient. 2. If production were inside the PPF , such as at point H, more could be produced of both goods without forgoing either good. Production is inefficient Production is inefficient. 3.1 PRODUCTION POSSIBILITIES Tradeoffs and Free Lunches Figure 3.3 on the next slide illustrates the distinction between a tradeoff and a free lunch....
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This note was uploaded on 09/29/2009 for the course ECON 101 taught by Professor Balaban during the Spring '07 term at UNC.

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Ch3___PPF__CompAdv__GainsFromTrade__Handouts_ - The...

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