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Unformatted text preview: Lecture III Production Possibility Frontiers, Trade, and Growth (Chapter 2 and Addendum, pp. 27-33 and 38-51)
I. II. III. IV. Production Possibility Frontiers Trade Comparative Advantage Shifting the PPF (Growth) I. Production Possibility Frontiers (PPFs) I. A. Defining the PPF B. Examples C. Opportunity Costs Defining the PPF Defining Models of Production VS. Consumption Production Possibility Frontier (PPF) A graph that shows the combinations of graph two commodities that can be produced given a fixed level of technology and resources being used efficiently at a fixed point in time. point B. Examples B.
i. The Dog on a Leash 25 yards of chain (resource) 2 options (mailman or other dog) PPF maps the maximum amount of reach PPF for the dog. for ii. Example ii.
Ya g b c f Scarcity Choice Efficiency d PPF e X Unemployment Unemployment of resources of C. Opportunity Costs C. A PPF with a constant PPF slope has _________ opportunity costs. opportunity A PPF with a PPF changing slope has ________ opportunity costs. costs. Guns Ga Gb GC GD a b c d PPF Ba Bb Bc Bd Butter The law of __________ marginal opportunity costs As an economy produces ______ of a good, the As opportunity cost of an additional unit, expressed in terms of other goods sacrificed, will __________. __________. Why? Comparative Advantage of a Resource All resources are not equally efficient or suitable All not for producing all outputs. for Example: Example: Consider a farmer growing crops. Different crops thrive on different types of soil and different climates. Robinson Crusoe Example pages 17-18 in course packet pages Problem Set-up Robinson is alone on an island with the following resources: Land Sheep 10 • • hours a day for working Note that not all land is equally suited for sheep/wheat. There is a simplifying assumption that wheat is not used in the process of raising sheep. Bread in loaves Robinson’s PPF 20 ab 16 12 8 4 0 2 c d e 4 f6 8 10
Cloth in yards Questions: 1. 2. 3. 4. 4- Label a point on the PPF that is unattainable. Label a point that is attainable, but inefficient. Label a point that is efficiently using all resources. Find the opportunity cost of moving from 0 to 1, 1-2, 2-3, 3-4, 5 yards of cloth. 5. What is the opportunity cost of moving from 0 to 6 loaves of bread? What is the cost of 1 unit? 6. Are opportunity costs constant or increasing in this PPF?
If they are increasing, explain why this could be. II. Trade II. Specialization and exchange Self-sufficiency Specialization and trade Gains from specializing Barter Mediums of Exchange Ticket Trading Lessons Ticket Market setting facilitates Market specialization and exchange specialization Trade is not a “_________ game” Trade Creates _________ 1) When individuals engage in a 1) voluntary exchange, both parties are made better off. made 2) By channeling goods and resources 2) to those who value them most, trade creates ______ and increases the __________ created by society’s finite resources. resources. Transaction Costs Transaction
The time, effort, and other resources needed to The _________, __________, and ___________ an exchange. exchange. Transaction costs can _________ trade, particularly in Transaction barter economies. barter Adding a ____________ can reduce transaction costs. Adding Why is this? Why Alleviates the need for mutual _______________. III. Comparative Advantage III. Comparative Advantage You have the _______ opportunity cost of producing You something. something. Absolute Advantage You can produce ________ of a good with the same You amount of resources as someone else. This can occur due to previous experience and/or natural talents. talents. Law of Comparative Advantage Law Individuals, firms, regions, or nations can gain Individuals, by specializing in the production of goods that they produce cheaply (at a low opp. cost) and _____________ them for goods they cannot produce cheaply. produce This law enforces the idea that specialization in This production is ____________ than self-sufficient production. production. The slope of the PPF represents the opportunity cost opportunity Linear PPF Constant slope so Constant constant opportunity cost cost Curved PPF Changing slope so Changing changing opportunity cost cost Building Trade Ideas Using PPFs Building Gilligan’s PPF
Coconuts 6 Skipper’s PPF
Coconuts 3 3 Bananas Bananas 9 Creating Linear Equations from a PPF PPF Gilligan Y = 6 – 2X or C = 6 – 2B Skipper Y = 3 – (1/3)X C = 3 – (1/3)B Opp. Cost Of 1 Coconut ½ banana Opp. Cost of 1 Banana 2 coconuts The slope tells us the The opportunity cost of 1 unit of the __________ in terms of the amount of ______________. of Gilligan Skipper 3 1/3 bananas coconut Comparative Advantage Comparative
Who has the ________ opportunity cost? Who has comparative Who advantage at coconuts? advantage Who has comparative Who advantage at bananas? advantage Opp. Cost Of 1 Coconut ½ banana Opp. Cost of 1 Banana 2 coconuts Therefore, Gilligan Therefore, should specialize in _________ and Skipper in __________. in Gilligan Skipper 3 1/3 bananas coconut Absolute Advantage Absolute To calculate absolute advantage, we compare To the ________________. Question to keep in mind is if all resources are Question dedicated to one type of good, what is the maximum amount each person could attain? amount Gilligan Skipper Robinson Crusoe page 19 in packet page Now suppose that there are two people on Now the island – Robinson and Friday. R
Bread O.C. of 1 Cloth Bread O.C. Cloth in loaf of in loaves bread yards loaves bread yards O.C. O.C. or 1 yard cloth cloth F Bread in Bread loaves loaves O.C. Cloth O.C. Cloth of 1 in loaf of yards yards bread bread O.C. O.C. of 1 yard cloth cloth a b c d e f 20 18 15 11 6 0 --- 0 1 2 3 4 5 --- a1 b1 c1 d1 e1 8 7 6 5 0 ------ 0 2 4 6 9 --- --- --- Bread in loaves Robinson’s PPF 20 ab 16 12 8 4 0
a’ c d
b’ Friday’s PPF e C’ d’ 2 4 f6 8 e’ 10 Cloth in yards Questions: 1. 2. 3. 4. Who has the absolute advantage in cloth production? Bread? Who has the comparative advantage in cloth production? Bread? If Robinson has bundle d and Friday bundle b’ before trade, what are the quantities of the goods produced? If they specialize, each will produce only the good for which they have the comparative advantage. What is the total amount of each product in this case? 5. Assuming they trade, what are the overall gains to the economy? Determining comparative advantage Determining Graphically: Slope of PPF indicates opportunity cost Whoever has _________slope with respect to Whoever X axis has _________ opportunity cost of producing X. producing Mathematically: Calculate opportunity costs for each person. Bread in loaves Robinson’s PPF 20 ab 16 12 8 4 0
a’ X c d
b’ Friday’s PPF e C’ d’ 2 4 f6 8 e’ 10 Cloth in yards Bread in loaves Robinson’s PPF 20 ab 16 12 8 4 0
a’ X c d
b’ Y Friday’s PPF e
C’ d’ 2 4 f6 8 e’ 10 Cloth in yards Tiger Woods and the Lawn Care Service Tiger
Golfing PPFlawn service PPFTiger Mowing The flatter slope for the PPF of the lawn service indicates a lower opportunity cost for mowing. ...
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