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Econ11Fall2006NotesForLecture_3Sept13 - Lecture III Notes...

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Lecture III: Notes For Sept 13, 2006; I. Production Possibility Frontier From Lecture #2 II. Choosing Outputs to Maximize Revenue on the PPF III. Using the Linear PPF to Illustrate Gains From Trade I. The PPF Frontier Diagram - Non-Linear Version – Lecture #2 A. Consider a PPF for XON between gasoline and fuel oil 1. Xon has crude petroleum, labor & refineries in which it can make either gasoline or fuel oil. Technical efficiency indicates the maximum amount of gasoline that can be produce given fuel oil output. 2. The slope of the PPF shows how much gasoline XON must give up to get an additional gallon of fuel oil - that is the opportunity cost of oil. Note that the PPF gets steeper as fuel oil production rises - the opportunity cost of fuel oil is increasing as you try to produce more of fuel oil! 3. What is happening to the opportunity cost of gasoline? Gasoline Slope = G/ F, opportunity cost of G is high, Slope = G/ F, opportunity cost of gasoline is low Fuel Oil B. What happens to the PPF if new technology lets you get
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more refined product (gasoline or oil) from given petroleum? 1. The PPF shifts out with technological progress. 2. If the technology only raised gasoline output, then the PPF would rotate out around the intercept on the fuel oil axis. C. What if the amount of petroleum (crude oil) fell? 1. The PPF would shift in – just like the linear PPF D. Why not produce inside the PPF?
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Econ11Fall2006NotesForLecture_3Sept13 - Lecture III Notes...

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