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Notes Jan27 - -Production Point slides along PPF(produce...

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EC340 Sec. 3 Professor Matusz 1/27/11 Constant Opportunity Cost Increasing Opportunity Cost As you move from A to B, no change As you move from C to D, increase in opportunity cost of x. Px/Py constant. in opportunity cost of x. In Autarky, production (and consumption) Px/Py increases. In Autarky Py determined by demand conditions. moving from C to D will determine relative price as well as how much is produced.
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(Refer to graph on last page) Allow economy to trade with the rest of the world. For now, assume that trade must be balanced. Import one good and export the other to pay for it. Suppose on the world market, Px/Py is lower than autarky. Then you would produce less x and more y. Because consumption frontier passes to northeast of autarky, we know that trade would let us consume more of both goods if we choose to do so. When the country opens to trade, it no longer needs to produce what it consumes.
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Unformatted text preview: -Production Point slides along PPF (produce more x and less y if Px/Px is greater than autarky and produce more y and less x if Px/Py is less than autarky.)-Trade line (consumption frontier) is drawn tangent to new production point-Consumption frontier will lie to northeast of Autarky consumption and production point (we could have more of everything if we choose) Why is the slope of the PPF concave?-Need more than one input (Factors of Production)-Need special (but plausible) assumptions about technology-Assume two factors of production (labor and capital)-Technology is the knowledge of how we combine capital and labor to produce output-Assume that production of different types of goods use capital and labor in different proportions. Kx = Amount of capital used to produce x Lx = Amount of labor used to produce x Kx/Lx = The capital intensity of sector x...
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