lecture2m - lecture2 Production Possibilities Curve(a.k.a...

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lecture2 1 Production Possibilities Curve (a.k.a. Production Possibilities Frontier) Let’s use the Production Possibilities Curve (PPC) to examine opportunity cost. PPC - shows the maximum amount of goods and services that can be produced, for a given level of technology and resources. Suppose we are on a deserted tropical island, with Robinson Crusoe (RC) and Friday. There are only two activities to spend time on, banana gathering and fishing. Each person has specific productive abilities. PPC can be represented numerically and graphically (and algebraically if you want). We’ll suppose the following figures represent the possible production, say from a day’s work, that RC and Friday can achieve. RC Friday Fish Bananas Fish Bananas 12 0 24 0 or 11 1 or 22 1 or 10 2 or 20 2 . . . . or 1 11 or 2 11 or 0.5 11.5 or 1 11.5 or 0 12 or 0 12 We will assume that all other linear combinations of production can occur. That is, we will connect the dots. Thus, we are assuming that half or even a 10 th of a banana can be produced. Don’t worry about this. RC Friday Fish Fish 24 RC’s PPC Friday’s PPC 12 12 Bananas 12 Bananas Those points on or inside the PPC are feasible (possible). Points outside the PPC are unattainable (not possible). Points inside the PPC are inefficient, as society is not producing as much output as is possible with the given resources and technology. In other words, resources are being wasted. We could do better. Points actually on the PPC are efficient (society can do not better with the resources and technology). For an example of inefficient use of resources, consider Mark McGwire cooking meals for people, and Julia Child hitting clean up for the Cardinals. Do you think we could arrange resources differently and get more recipes and homeruns? Notice that that the PPC holds technology and the amount of productive resources constant. If we add resources or improve technology, this will shift the PPC outward (to the right). This is economic growth. Likewise, if we have fewer productive resources or degrade technology, this will shift the PPC inward. This is economic contraction. We won’t worry much about this, but in Econ 212 you will maybe? Notice how scarcity is depicted. If RC wants more fish, he must produce fewer bananas. If he wants additional bananas, he must give up fish. (The PPC slopes downward)
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lecture2 2 Also, we have drawn a linear PPC. That is, the opportunity cost of producing a banana remains constant as we produce more and more bananas. This keeps the math simple, and we’ll do this unless mentioned otherwise. Read the book about why the PPC really is not straight. Absolute Advantage People often get absolute advantage confused with comparative advantage . To determine who has the absolute advantage in an activity, we have both people completely specialize in that activity. Whoever is capable of producing the most of the good has the absolute advantage.
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