Ch03 - CHAPTER CHECKLIST When you have completed your study...

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When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Use the production possibilities frontier to illustrate the economic problem. 1 Calculate opportunity cost. Explain how people gain from specialization and trade. Explain how technological change and increases in capital and human capital expand production possibilities. 2 3 4
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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.
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Figure 3.1 shows the PPF for bottled water and CDs. Each point on the graph represents a column of the table. The line through the points is the PPF . 3.1 PRODUCTION POSSIBILITIES
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3.1 PRODUCTION POSSIBILITIES The PPF puts three features of production possibilities in sharp focus: Attainable and unattainable combinations Full employment and unemployment Tradeoffs and free lunches
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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 unattainable combinations.
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The PPF separates attainable combinations from unattainable combinations. Points outside the PPF such as point G are unattainable. We can produce at any point inside the PPF or on the frontier. 3.1 PRODUCTION POSSIBILITIES
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3.1 PRODUCTION POSSIBILITIES Full Employment and Unemployment Full employment occurs when all the available factors of production are being used. Unemployment occurs when some factors of production are not used. Figure 3.3 on the next slide illustrates full employment and unemployment.
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1. When resources are fully employed, production occurs at points on the PPF such as D and E . 2. When resources are unemployed, production occurs at a point inside the PPF such as point H . 3.1 PRODUCTION POSSIBILITIES
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Caveats … Like all models, the PPF involves some simplification The full employment/unemployment issue highlights this; it only makes sense with respect to labor if we assume all labor works at some fixed intensity for a fixed number of hours/year – obviously not quite true.
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3.1 PRODUCTION POSSIBILITIES Tradeoffs and Free Lunches Tradeoff
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Ch03 - CHAPTER CHECKLIST When you have completed your study...

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