Opportunity+Cost+and+Gains+from+Trade

Opportunity+Cost+and+Gains+from+Trade - Opportunity Cost...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Opportunity Cost, Comparative Advantage and Gains from Trade
Background image of page 1

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

View Full DocumentRight Arrow Icon
Understanding Opportunity Cost Suppose Kobe Bryant owns a big house right here in Orange County and he needs someone to mow the lawn every week. He could do it – it takes him 2 hours to finish the job. He could ask his neighbor’s teenaged son (John) to do it. It will take John 4 hours to finish the job. Should Kobe hire John to mow the lawn?
Background image of page 2
Understanding Opportunity Cost Now let’s say Kobe’s opportunity cost is $10,000/ hour. Jon’s opportunity cost is $15/hour. What’s your answer now?
Background image of page 3

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

View Full DocumentRight Arrow Icon
 The Production Possibilities Frontier The Production Possibilities Frontier (PPF) : a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology Example: Two goods: computers and wheat One resource: labor (measured in hours) Economy has 50,000 labor hours per month available for production. 0
Background image of page 4
PPF Example Producing one computer requires 100 hours labor. Producing one ton of wheat requires 10 hours labor. 5,000 0 4,000 100 2,500 250 1,000 400 50,000 0 40,000 10,000 25,000 25,000 10,000 40,000 0 500 0 50,000 E D C B A Wheat Computers Wheat Computers Production Employment of labor hours 0
Background image of page 5

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

View Full DocumentRight Arrow Icon
Point on graph Production Com- puters Wheat A 500 0 B 400 1,000 C 250 2,500 D 100 4,000 E 0 5,000 A B C D E PPF Example
Background image of page 6
A. On the graph, find the point that represents (100 computers, 3000 tons of wheat), label it F . Would it be possible for the economy to produce this combination of the two goods? Why or why not? B. Next, find the point that represents (300 computers, 3500 tons of wheat), label it G . Would it be possible for the economy to produce this combination of the two goods? Points off the PPF Points off the PPF 7
Background image of page 7

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

View Full DocumentRight Arrow Icon
Answers Answers 8 Point F : 100 computers, 3000 tons wheat Point F requires 40,000 hours of labor. Possible but not efficient: could get more of either good w/o sacrificing any of the other. 0 1,000 2,000 3,000 4,000 5,000 6,000 0 100 200 300 400 500 600 Computers Wheat (tons) F
Background image of page 8
Answers Answers 9 0 1,000 2,000 3,000 4,000 5,000 6,000 0 100 200 300 400 500 600 Computers Wheat (tons) Point G : 300 computers, 3500 tons wheat Point G requires 65,000 hours of labor. Not possible because economy only has 50,000 hours. G
Background image of page 9

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

View Full DocumentRight Arrow Icon
The PPF:  What We Know So Far Points on the PPF (like A E ) possible efficient: all resources are fully utilized Points under the PPF (like F ) possible not efficient: some resources underutilized ( e.g., workers unemployed, factories idle) Points above the PPF (like G ) not possible
Background image of page 10
The PPF and Opportunity Cost Recall: The opportunity cost of an item is what must be given up to obtain that item.
Background image of page 11

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

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/23/2010 for the course ECONOMICS Econ 13 taught by Professor Georgesarraf during the Winter '10 term at UC Irvine.

Page1 / 40

Opportunity+Cost+and+Gains+from+Trade - Opportunity Cost...

This preview shows document pages 1 - 12. Sign up to view the full document.

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