Chapter 2 Notes

Chapter 2 Notes - [ChapterTwo]...

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[Chapter Two] The Production Possibility Model,  Trade, and Globalization Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. Demonstrate opportunity cost with a production possibility curve. 2. State the principle of increasing marginal opportunity cost. 3. Relate the concept of comparative advantage to the production possibility cure. 4. State how, through comparative advantage and trade, countries can consume beyond their production possibilities. 5. Explain how globalization and outsourcing are part of a global process guided by the law of one price. Chapter Outline The Production Possibility Model, Trade, and Globalization The three main coordination problems are reviewed, and students are reminded about the concept of opportunity cost, which will be central in this chapter to understand production possibilities. The Production Possibilities Model Production Possibility Table: “a table that lists a choice's opportunity costs by summarizing what alternative outputs you can achieve with your inputs.” Output: “a result of an activity.” Input: “what you put into a production process to achieve an output.” A Production Possibility Curve for an Individual An example is given wherein a student has one input, 20 hours of time per week, to use to produce two goods, a grade in an economics course
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and a grade in a history course. All 20 hours devoted to economics results in a grade of 100%; each hour less than 20 reduces the score by 3 percentage points. All 20 hours devoted to history results in a grade of 98; each hour less than 20 reduces the score by 2 percentage points. Production Possibility Curve (PPC): “a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs.” The PPC for the study-time example from this section is graphed. It slopes downward from left to right, showing the trade-off between grades in economics and grades in history. Two important points about the PPC: “1. There is a limit to what you can achieve, given the existing institutions, resources, and technology. 2. Every choice you make has an opportunity cost. You can get more of something only by giving up something else.” Increasing Marginal Opportunity Cost The Principle of Increasing Opportunity Cost: “In order to get more of something, one must give up ever-increasing quantities of something else.” A PPC displaying increasing marginal opportunity costs is bowed- outward. This is because some resources are better at producing certain kinds of goods. A bowed-outward PPC showing the trade-off between “guns” (defense goods) and “butter” (domestic needs) is given numerically and graphically. Comparative Advantage
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This note was uploaded on 12/03/2011 for the course ECON 101 taught by Professor Smith during the Fall '11 term at North Shore.

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Chapter 2 Notes - [ChapterTwo]...

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