Lecture+2+September+8+_with+additional+slides_

Lecture+2+September+8+_with+additional+slides_ - Today’s...

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Unformatted text preview: Today’s Agenda • Production Possibility Curves • Opportunity Cost • An Application of Opportunity Cost Reasoning: The Surprising Principle of Comparative Advantage Production possibility curves illustrate some basic economic themes... • Scarcity • Choice • Opportunity cost Productive Resources • natural resources • human resources • produced resources Butter Guns Deriving the Production Possibility Curve Butter Guns a Butter Guns a b Butter Guns a b Butter Guns Butter Guns Production possibility curve Attainable combinations Butter Guns Un attainable combinations x y z Butter Guns Effect of economic growth on PPC Butter Guns Effect of economic growth on PPC Butter Guns 1 1 1 a b c a < b < c Opportunity cost = - slope of PPC Why do we buy and sell? • Individuals have different skills. • Trade allows them to benefit by specializing . • Same principle applies to • regions • nations • Through trade, they can • produce just what they make efficiently • trade for the rest • And consume outside their PPCs • Exchange makes both parties better off. David Ricardo 1772-1823 • The Principles of Political Economy and Taxation • 1817 Labor Productivity in Labor Food Clothing Available U.S. 20 15 100 U.K. 10 20 120 • U.S. has higher productivity in food production than the U.K. • The U.S. has an absolute advantage in food. • U.K. has higher productivity in clothing production than the U.S. • The U.K. has an absolute advantage in clothing. Labor Productivity in Labor Food Clothing Available U.S. 20 15 100 U.K. 10 20 120 • U.S. has higher productivity in food production than the U.K. • The U.S. has an absolute advantage in food....
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Lecture+2+September+8+_with+additional+slides_ - Today’s...

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